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Bush to Propose Borrowing From Fed to Boost FDIC

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From Associated Press

The Bush Administration plans to ask Congress this week to authorize up to $25 billion in borrowing from the Federal Reserve in the event that the government fund insuring bank deposits needs to be replenished.

The borrowing plan would provide even more than the $15 billion requested three weeks ago by the chairman of the Federal Deposit Insurance Corp., L. William Seidman. It seeks to avoid a taxpayer bailout of the dwindling FDIC fund by having banks repay the loan through insurance premiums charged by the fund.

“They took our plan and improved it,” Seidman said. “The fact that we’re actually borrowing money and raising funds to pay it back at the same time is something that ought to appeal to all of those who want to protect the taxpayers.”

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However, if the banking industry were to deteriorate beyond expectations and be incapable of repaying the loan through premiums, taxpayers could bear the loss. That’s because any loss suffered by the Federal Reserve would reduce the Fed’s earnings, forwarded every year to the Treasury.

The FDIC would pay interest to the Fed. Bank premiums, now 19.5 cents per $100 worth of deposits, would be capped at 30 cents.

Disclosure of the Administration plan came in a letter, dated Friday, from Treasury Under Secretary Robert R. Glauber to Seidman.

Glauber told Seidman that the borrowing plan will be included in the Administration’s broad plan to overhaul the banking system. Rep. Frank Annunzio (D-Ill.) told members of his House Banking subcommittee on financial institutions Monday that he expects the Administration to forward a draft of its legislation today.

While Congress debates the measure, Seidman has said he intends to borrow up to $10 billion under his agency’s existing authority. Without the borrowing, the fund, which sank to $8.4 billion at the end of 1990, could run out of money by year-end.

In addition to the $10 billion it can borrow, the FDIC currently has a $5-billion line of credit with the Treasury. As a backup, Seidman had requested an additional $15 billion in authority.

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