The head of the Federal Deposit Insurance Corp. yesterday again asked Congress to limit the eligibility of so-called brokered deposits for federal insurance coverage.
William M. Issac, who has long contended that brokered deposits are a major threat to the government's $17 billion insurance fund, said that the current $100,000 deposit insurance limit should be applied to the broker rather than to each individual deposit the broker makes on behalf of clients.
If a so-called money broker makes deposits of $100,000 for 10 different clients in a bank or savings and loan association, each of those deposits now is eligible for full insurance protection. Isaac would limit the total coverage to $100,000. In effect, his proposal would make the broker, not the broker's client, eligible for deposit insurance.
In testimony before a House Banking subcommittee, Isaac said a second-best alternative would be to restrict how many brokered deposits an institution could collect. He said that Congress might consider limiting the amount of brokered deposits at any institution to no more than its capital.
Brokered deposits are large deposits made by individuals and institutions who use so-called money brokers to spread their deposits over a number of banks and thrifts in $100,000 blocks to achieve full insurance and high yields.
Merrill Lynch Money Markets Inc. -- which the FDIC said is the top supplier of fully insured brokered deposits to troubled, FDIC-insured banks and thrifts -- said it supports legislation that addresses the potential abuses of short-term brokered deposits by institutional investors but does not impair the ability of individuals to place primarily longer-term deposits through brokerage firms.
"The key to successful legislation on this issue is distinguishing between the distinct brokered deposit markets and addressing only those areas where abuses have occurred," said Emanuel J. Falzon, president of Merrill Lynch Money Markets.