WASHINGTON -- The federal fund that insures bank deposits will be insolvent by the end of 1991 as a result of the severe slump in real estate and mushrooming bank failures, the Congressional Budget Office said yesterday.
To bolster the banking system, President Bush in his State of the Union message last night proposed a comprehensive overhaul of the nation's bank laws, which date to the Great Depression.
"Our banks," he said, must "remain safe and secure [so they can] continue to make job-creating loans for our factories, businesses and home-buyers. . . . Sound banks should be making more loans, now -- and interest rates should be lower, now."
The package, to be made public later this week, calls for removal of barriers that have sharply limited interstate banking, prevented the merger of commercial banks and investment banks and prohibited industrial companies from owning commercial banks.
A sweeping reform of the regulatory structure that oversees banks will also be recommended.
By strengthening bank powers, the administration hopes the drain on the insurance fund will be limited.
To solve what he called a "liquidity crisis" in the fund, the CBO director, Robert D. Reischauer, suggested to the Senate Banking Committee that the fund be allowed to borrow at least $11 billion from the Treasury, in addition to raising further contributions from banks.
That need was based on a CBO forecast of a mild recession ending by this spring, which could alleviate the deep slide in real estate and bank profits.
Should a severe recession occur, however, as much as $38 billion would be needed by the insurance fund, Mr. Reischauer said, raising the specter of a taxpayer bailout, since that much money probably would be beyond the resources of the already weak banks.
Congress might also want to avoid borrowing of that size, however, since it adds to the budget deficit.
Although the fund is on the verge of insolvency, members of the Senate panel emphasized that deposits of up to $100,000 in federally insured institutions would remain protected by insurance.
That could prove costly to taxpayers. In a similar government rescue of the savings and loan industry, protecting depositors in insolvent S&Ls will cost as much as $500 billion over the next 40 years, according to estimates last year by the General Accounting Office.
Banking leaders have been meeting in recent weeks to devise a plan to protect the insurance fund that would avoid a taxpayer bailout of the kind marking the S&L rescue.
One approach being considered would be to set up a special fund to help banks with low capital merge with healthier institutions.
Yesterday's CBO report conformed closely to a projection by the Office of Management and Budget, to be included in the 1992 budget which the president is sending Congress next Monday, which shows that the bank insurance fund will be insolvent in 1992.
This estimate shows that the fund will have a deficit of $4 billion by the end of next year and that the shortfall will reach $23 billion by 1995.
Members of the Senate panel reacted with alarm to the CBO report, which comes as the Congress is already facing huge budget deficits in 1991 and next year.
"We want to do everything possible to avoid another massive taxpayer expenditure," said Sen. James Sasser, D-Tenn., chairman of the Senate Budget Committee.
Mr. Reischauer reported to the committee that the CBO is projecting that the budget deficit will reach a record $290 billion to $300 billion this fiscal year, and $280 billion to $290 billion in the 1992 fiscal year, which starts Oct. 1. The previous record was a $221 billion deficit in 1986.
The CBO budget outlook will be presented today to the House Budget Committee.
According to Mr. Reischauer, the banking insurance fund will show a slender surplus of $1.4 billion at the end of the current fiscal year and a deficit of $2.8 billion in the 1992 fiscal year.
But if economic recovery takes hold as projected, a surplus would emerge in the fund starting in 1995, according to the CBO forecast.
As a result, Mr. Reischauer recommended that the fund borrow temporarily from the Treasury until 1996 and then start repaying the loan as bank conditions improve. That would avoid a direct increase in taxes to bail out the fund, he said.
As a central part of shoring up the fund, he said bank contributions should be raised further starting this July. From the current rate of 19.5 cents per $100 of deposits, they would increase in July to 23 cents per $100 of deposits. The premiums would go up to 27 cents per $100 in deposits next January, and to 30 cents in January 1993.
Sen. Donald W. Riegle Jr., D-Mich., chairman of the banking panel, said after yesterday's hearing that the CBO provided a "very powerful assessment" of the plight of the insurance fund, but he sidestepped backing any particular method for replenishing it.
There was no immediate reaction from the American Bankers Association to the CBO report.