Bush Warns of FDIC Bailout If Major Bank Overhaul Fails

President Bush warned Monday that Congress risks a second rescue of the Federal Deposit Insurance Corp. unless it enacts the Administration’s sweeping banking system overhaul.

“A bill that would merely recapitalize the bank insurance fund and make minor changes to the law would be shortsighted,” Bush wrote in letters to the leaders of the House and Senate banking committees.

“We must fix the fundamental problems in the banking industry, not just fund them,” he wrote. “If the Congress fails to adopt a broad-based solution along the lines I have suggested, we may have to face another recapitalization of the insurance fund.”

Bush’s letter was sent to Congress on the eve of the first committee session to begin writing the legislation. The House Banking subcommittee on financial institutions is scheduled today to act on a bill that authorizes the FDIC to borrow up to $25 billion to cover bank losses and protect depositors. The loans would be repaid by raising banks’ insurance premiums, but repayment would be guaranteed by the taxpayers.

The bill would also give regulators additional power to crack down on weak banks early, before losses get out of hand.

Next week, the subcommittee is expected to begin work on a second bill encompassing the structural reforms the Administration proposed in February. They are considered the most comprehensive rewrite of banking laws since the Depression.

The Administration wants to permit banks to enter the securities and insurance business, discourage regulators from protecting uninsured deposits over the $100,000 per account limit, allow industrial and commercial firms to own banks, simplify the complex regulatory bureaucracy and lift remaining barriers to interstate banking.

The deposit insurance and interstate banking reforms are seen as having the best chance of enactment. The other proposals appear to have less congressional support.

Bush warned that the economy’s vitality depends on broad-based reform because weak banks tend to cut back on lending.

“We must have a comprehensive legislative solution to fuel economic growth through stronger, more competitive banks--ones that are better able to lend to customers in good times and bad,” he wrote. “Without comprehensive reform the economy is exposed to the potential of future credit crunches.”

Rep. Henry B. Gonzalez (D-Tex.), chairman of the House Banking Committee, had favored emergency action on a narrow bill limited largely to replenishing the FDIC. He said he feared that the other issues were too controversial and would bog down the urgently needed FDIC replenishment.