Insuring Bank Deposit Insurance

March 26, 1991

Congress will have to keep its calculators at the ready to determine the huge sums needed to shore up the Federal Deposit Insurance Corp. so commercial banks do not get into an S&L-style mess that leaves taxpayers holding the bag.

Only two months ago, when concern escalated about the FDIC's Bank Insurance Fund, the talk was of a cash-flow problem of less than $10 billion. Then, on two successive days last week, the ante went up first by $25 billion and then by $45 billion. Total: $75 billion!

The difference between this and astronomical savings and loan bailout figures is that the Treasury is trying hard to come up with a plan that would be financed by the commercial banks themselves. Premium charges on deposit insurance would be increased a whopping 50 percent and the FDIC would get new authority to borrow billions from the Federal Reserve Board and the Treasury's own Federal Financing Bank.

Ironically, the accelerated need for deposit protection could undercut the administration's drive for the most sweeping overhaul of the American banking system since the New Deal. Many lawmakers on Capitol Hill, with encouragement from the bipartisan Congressional Budget Office, have been saying for months that attention this year should be focused on protecting deposit insurance funds rather than on more fundamental changes. Treasury Secretary Nicholas Brady has argued just as adamantly that unless the banking industry is permitted to keep up with the financial field's technological revolution its weaknesses cannot be corrected strictly on the insurance end.

This argument is persuasive but probably a non-starter. For one thing, the Brady reform proposals have drawn powerful opposition from small independent banks, from agricultural interests and from sources that fear an over-concentration of financial power in the hands of a few giant holding companies. (Even within the industry, there are raised eyebrows over the idea of permitting industrial holding companies to acquire commercial banks.) For another, legislators are so worried about an S&L bailout that just jumped another $30 billion that they are frantic to protect taxpayers from banking industry problems.

That this short-run approach probably will prevail cannot spare Congress, over the long run, from facing up to the need for more fundamental reform.

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