Deposit Insurance Hike Could Cost Savers

A congressional study released Wednesday said raising federal bank deposit insurance would cost financial institutions $3.5 billion over 10 years--an expense that probably would be passed on to savers.

Increasing insurance caps would require financial institutions to pay greater premiums to cover expected losses from increased protection as well as to maintain government insurance funds at required levels, the Congressional Budget Office said.

“That $3.5-billion rise in costs to the banking system over 10 years would most likely be passed on to consumers through a combination of increased service charges and lower interest rates on bank deposits,” the CBO said.

Congress is considering legislation that would boost the size of bank deposits covered under federal insurance to at least $130,000 per account and revamp the way banks pay into the insurance fund.

The House passed the measure last week by a vote of 408 to 18. The Senate Banking Committee has held one hearing on the topic.

The CBO study of the potential effects of raising the insured amount of deposits was commissioned by the ranking minority member of the Senate banking panel, Phil Gramm (R-Texas). Gramm opposes increasing insurance caps.

“The CBO analysis shows that this legislation would benefit no one other than a very narrow segment of wealthy Americans,” Gramm said in a statement.

Proponents of boosting deposit insurance note it has not been raised since 1980, when it was lifted to the current $100,000 on individual deposits, from $40,000. They said it would provide convenience to savers who have to divide their funds among several accounts to benefit from full coverage.

Supporters also said raising the caps would attract more deposits to banks and thrifts, and could increase the competitiveness of small banks, which are more dependent on deposits than large banks.

Opponents, including Federal Reserve Board Chairman Alan Greenspan and Treasury Secretary Paul H. O’Neill, said raising the caps on guaranteed deposits would encourage banks to make riskier loans and investments.

The CBO study concluded that raising the coverage limit would provide modest benefits to a small number of depositors and trigger a small increase in the total volume of bank deposits. But the rise would deliver few benefits to small banks and raise the cost of insurance “significantly” for depository institutions and depositors, the CBO said.