The first overhaul of the nation's system of bank insurance in half a century has begun with competing recommendations to Congress from the three agencies that insure banks, savings and loans and credit unions.
Copies of their reports, which were released yesterday, show substantive differences among the Federal Deposit Insurance Corp., the Federal Savings and Loan Insurance Corp. and the National Credit Union Administration on such key issues as risk-related premiums, private insurance and merger of the insurance funds. They also disagree on the wisdom of consolidating the multiple banking regulatory agencies.
Federal bank insurance was created in the 1930s to take the risk out of depositing funds in a bank; today's review aims at restoring some of that risk. The Roosevelt administration cracked down heavily on banks and limited their activities; the Reagan administration has eased regulation enormously by eliminating interest-rate ceilings and giving financial institutions new powers. Now it faces the task of reforming the 50-year-old insurance system and increasing market discipline to protect the benefits of deregulation.
Current law insures deposits up to $100,000. But in practice even uninsured deposits over that amount benefit from implicit federal protection because depositors routinely get all their money back when a failing bank is merged with a sound one.
This situation sometimes prompts depositors to put their funds in unsound banks that lure them with higher rates. All the regulators would restore the risk to depositors of putting more than $100,000 in their accounts as a way of teaching them and the banks to be more careful with their money. But they differ on the ways.
The FDIC proposes to insure only 75 percent of accounts over $100,000. In case of bank failure, it would estimate how many cents on the dollar the depositor is likely to get back and then give the depositor a claim on the remaining amount.
FDIC Chairman William Isaac suggested yesterday that large depositors seek private insurance for their funds that are not federally insured. However, he added that it does not seem feasible for banks to seek private insurance. The largest bank failure the private insurance system could cover would be $1 billion, hardly sufficient protection for giant banks. There is $419 billion in uninsured deposits in commercial and mutual savings banks.
Moreover, he said, the companies would have difficulty determining what premiums to charge because they do not have access to secret bank examination data.
Credit unions, on the contrary, have years of experience with private insurers because there was no government insurance until 1970. For balances over $100,000, the NCUA recommends a tiered structure combining private and federal insurance.
All similar financial institutions now pay the same premium rates to the federal insurance funds. The NCUA opposes relating government agency premiums to the soundness of banking institutions as "theoretically and practically inconsistent with the government's role as an insurer of last resort."
The FSLIC and the FDIC favor risk-related premiums. Savings and loans would be rated on the basis of interest-rate risk, default risk and real net worth. The FDIC proposes to divide banks into normal, medium and high-risk categories with commensurate premiums.
A bank could be considered high-risk if it had a very low capital ratio, less than 3 percent equity to assets to start. If it had either a severe mismatch of interest rates on its deposits and loans or classified (risky) loans equal to 70 percent of its capital, it would be a medium risk. It is expected that 80 percent of the banks would pass all three tests.
Isaac said the FDIC has made no decision on whether to make premiums public (and thus reveal the shaky condition of some banks). However, he said the FDIC will try to get banks to disclose more information, to publish enforcement actions in the Federal Register and to make comparative performance data on banks available to analysts and the media. The aim is to enable depositors to avoid putting their funds in unsound banks and to spread funds around to many banks, not just the riskiest ones paying the highest rates.
There is a major turf disagreement on restructuring the agencies to eliminate duplication and overlap. The FDIC, advocating the most-far-reaching changes of the three, would create one insurer for banks and thrifts and a separate one for credit unions. The FSLIC and the NCUA want to remain independent.