Volker Sees Taxpayer Bailout of Bank Fund : Finance: The former Fed chief told a Senate panel that banks can’t afford to pay much more into the fund that insures their deposits.

Former Federal Reserve Board Chairman Paul A. Volcker on Wednesday predicted that U.S. taxpayers will be called on to bail out the dwindling fund that insures deposits in the nation’s banks.

Volcker, testifying before the Senate Banking Committee, said the fund, which pays depositors when banks fail, needs an urgent cash infusion.

But he said commercial banks could not afford to pay much more to rebuild the fund than they are already.

“Unhappy as the situation may be, substantial public funds will be required to bolster the resources available to the (fund),” he said.

Bank failures over the past few years have reduced the fund to its lowest level ever. FDIC Chairman L. William Seidman has predicted that it could run out of money altogether by the end of the year if the recession persists.

Fearing a repeat of the $500-billion savings and loan bailout, the Bush Administration and Congress have opposed using taxpayer money to boost the fund.

Volcker, whose eight-year term at the Fed ended in 1987, said the needs of the bank fund will be far smaller than the sums required to close scores of failed thrifts and pay their depositors.

But he asserted that “commercial banks themselves cannot be expected to provide a really significant portion of the funds beyond the much-increased (premiums) already announced.”

Banks are charged insurance premiums of 19.5 cents for every $100 of domestic deposits to the Federal Deposit Insurance Corp. The figure will rise to 23 cents per $100 on July 1 to help pay back loans needed to rebuild the fund.

On Tuesday, a House panel passed a bill that would permit the FDIC to borrow up to $30 billion from the Treasury.

Volcker, chairman of investment banking firm James D. Wolfensohn Inc., called on Congress to quickly give the FDIC the money it needs to insure deposits. He warned that failure to do so could shake confidence in the banking system and harm the economy.

“Removal from the FDIC of its ability to protect all the depositors of large failed banks could well trigger a crisis in the banking system of a magnitude entirely capable of turning a serious recession into something much worse,” he said.

In addition to shoring up the fund, Volcker urged the senators to pass broad reform of the nation’s banking laws this year.

“Without timely and suitably comprehensive legislation . . . the United States will be left with a comparatively weak, fragmented and crisis-prone financial system,” he said.

Volcker said the government should scale back deposit insurance coverage, remove barriers to nationwide branching and reform laws that bar banks from the securities industry.

Moves to allow banks into the insurance business, as suggested by the Bush Administration’s bill, could be put off until a later date, he said.

Volcker also disagreed with the Administration’s proposal to break down the barriers between banking and commerce and allow industrial firms to own banks.

He said a line should continue to be drawn between banking and commerce in the interest of sound public policy.