Senate Banking Committee Chairman Jake Garn (R-Utah) said yesterday he now believes Congress made a mistake when it raised the limit on federal deposit insurance to $100,000.
Opening hearings on deposit insurance reform, Garn said deposit insurance was created during the Great Depression to protect "little old ladies in tennis shoes," not the well-heeled investors who now benefit from government protection from financial institution failures.
Banking industry witnesses urged the committee to adopt remedies they said would discourage savers from putting their money into shaky financial institutions. Congress is considering changes in the present system because the Federal Savings and Loan Insurance Corp. has suffered heavy losses from the large number of failures of thrift institutions.
James G. Cairns Jr., president of the American Bankers Association, argued that the deposit insurance system should be changed so that anyone depositing more than $100,000 would have to expect not to get all of his or her money back if an institution failed.
The thrift industry and federal regulators are seeking ways to prop up insolvent savings institutions and replenish the shrinking federal insurance fund without the need for congressional action. One of their solutions is to charge banks that are considered shakier higher premiums for federal deposit insurance.
Although the banking and thrift industry representatives indicated their general approval of the concept yesterday, substantial controversy remains about how to structure it. The dispute could delay passage of legislation, especially if other provisions such as granting thrifts additional powers are put into the same bill.
Representatives of the U.S. League of Savings Institutions and the National Council of Savings Institutions outlined their plan for aiding the savings and loans without legislative action.
Their proposal calls for creating one or more quasi-governmental corporations that would buy bad assets from the Federal Savings and Loan Insurance Corp. and manage them until they could be resold.
The Federal Home Loan Bank Board is "well along" on that proposal and also is considering trying to borrow up to $20 billion from the 12 district banks, congressional sources said.