WASHINGTON -- The federal fund that protects bank deposits probably will show a deficit by the end of this year and will remain in the red until the mid-1990s, even if insurance premiums are steadily raised, the head of the Congressional Budget Office said yesterday.
To avert a taxpayer bailout of the fund, budget office Director Robert Reischauer recommended that the Federal Deposit Insurance Corp. quickly be allowed to borrow at least $5 billion more from the U.S. Treasury to cover unprecedented losses from expected bank failures.
Nonetheless, Reischauer's report, submitted to the Senate Banking Committee, is less pessimistic than other recent forecasts, including the White House's. Indeed, he said the banking industry's troubles seem to be only temporary, unlike those of the savings and loan industry.
"We are not here saying that this is a black hole of the sort that developed during the 1980s in the S&L industry," he said. Over the long run, he added, the insurance fund "is solvent despite the fact that in the short run there will be severe liquidity problems."
The relatively upbeat tone of Reischauer's testimony bothered several senators on the committee.
"Some of these projections seem mighty rosy to me," said Sen. Richard Shelby, D-Ala. "This testimony seems to lowball these figures."
The outlook might be too optimistic, Reischauer acknowledged. In forecasting losses at the FDIC's bank insurance fund, the budget office assumed the recession would be short and mild, with the economy rebounding in the second quarter after shrinking for six months at an annual rate of 1 percent.
But if this turns out to be an average recession, the economy would contract for 11 months at an annual rate of 2.6 percent. In that case, Reischauer conceded, the FDIC would need much more money and banks would be even harder pressed to pay up.
Senators also complained that the insurance fund's losses are being compounded by bank regulators, who they contended aren't moving swiftly enough to close failing banks. Sen. John Heinz, R-Pa., accused regulators of "basic incompetence."
The FDIC's insurance fund protects $2 trillion in deposits at the nation's 13,000 banks. Under law, accounts of up to $100,000 are guaranteed. In addition, the FDIC routinely covers bigger accounts and those held by foreigners at larger institutions.
The fund is financed by premiums paid by banks. The rate was raised Jan. 1 to 19.5 cents for every $100 in deposits from 12 cents per $100.
Bank failures, however, are taking much more out of the fund than the premiums are putting in. After losing $4 billion last year, the fund contained $9.2 billion at the end of 1990. FDIC Chairman L. William Seidman has said the fund's balance will drop to $4 billion by the end of this year.
But the Congressional Budget Office report warned that the fund will likely hold only $1.4 billion by the end of the fiscal year, Sept. 30. And Reischauer said it will almost certainly be out of money by Dec. 31, even if the FDIC boosts the insurance premium to 23 cents per $100 this year, as expected.
Having heard similar forecasts before, lawmakers are proposing several ways to replenish the bank insurance fund without taxing the public. Generally, the measures call for banks to recapitalize the fund by contributing 1 percent of their total deposits over the next few years.
The budget office report also assumed a "creeping recapitalization," raising the premium rate to 30 cents per $100 Jan. 1, 1993, a 150 percent increase from 1990.
Still, Reischauer said that probably won't cover expected bank losses, which he said will mount because of the recession and declining commercial real estate values. The higher rates notwithstanding, the budget office predicted the insurance fund will run deficits until 1995.