WASHINGTON - The Federal Deposit Insurance Corp. kicked off a wide-ranging debate yesterday about revamping deposit insurance by asking whether to increase the $100,000 insurance limit or charge higher premiums to riskier banks.
The deposit insurance system, though operating well, has structural problems that require banks "to fund insurance losses when they can least afford it," FDIC Chairwoman Donna Tanoue said.
In addition, some banks have complained that the bank and thrift deposit insurance funds are over-funded, with reserves at $40 billion, and have called for rebates.
"There will never be a better time than now to improve our deposit insurance system," given the banking industry's record profits of $72 billion in 1999, Tanoue said. The FDIC intends to ask Congress for changes next year.
"The system can be improved, it can be strengthened," she said.
Tanoue invited public comment on an 84-page staff report outlining reform options; she emphasized that no decisions have been made. The FDIC plans to develop recommendations this year and forward them to Capitol Hill after the next Congress convenes in January.
The report examines three areas for change: setting premiums, managing deposit insurance funds and setting limits on coverage. The FDIC oversees separate bank and thrift funds that insure up to $100,000 in a depositor's account.
The FDIC chief argued that the current premium structure could trigger serious economic turmoil when banks are weakened by a recession.
A 1991 law overhauling the deposit insurance funds set forth a system of "risk-based premiums" in which only banks and thrifts deemed unhealthy pay insurance premiums. As a result, 93 percent of banks and thrifts pay no deposit insurance premiums. Yet if a recession weakened banks and thrifts, they might once again have to pay premiums of 23 cents for every $100 of insured deposits.
"Today, such a premium would drain almost $9 billion from insured banks and thrifts, and such a premium could lead to a $65 billion contraction in lending," she said.
Tanoue noted that inflation has eroded the value of deposit insurance by about half since 1980. The FDIC report asks whether the $100,000 limit should remain the same, be indexed for inflation or be simplified further.
Federal Reserve Chairman Alan Greenspan and Treasury Secretary Lawrence Summers both oppose a banking industry proposal to double deposit insurance to $200,000. "Doubling deposit insurance, which essentially would be giving subsidies to upper-income individuals ... is a mistake," Greenspan told the Senate Banking Committee on June 21.