The keeper of the nation's deposit insurance funds urged a congressional committee yesterday to consider sweeping changes in the financial system to make U.S. banks more competitive and to protect taxpayers from bearing the full brunt of future bank failures.

L. William Seidman, chairman of the Federal Deposit Insurance Corp., told the Senate Committee on Banking, Housing and Urban Affairs that the government should scrap most of the restrictions placed on commercial banks in the 1930s, but asserted the need for strong regulatory oversight and limits on the use of federally insured funds.

He also repeated recent warnings that the FDIC faces further losses this year and is "very much stressed." He suggested that changes in the banking system should include a limitation on deposit insurance of $100,000 per account holder rather than allowing an individual to have an unlimited number of insured accounts.

Under current laws, Seidman said, deposit insurance was a "bad bet for society" that "costs too much for the value received." Balkanized banking rules subject major banks to a "mishmash of state laws," he said.

Seidman's FDIC is one of three agencies taking part in a major review of the deposit insurance and regulation of the financial services industry and his views were among the most comprehensive put forth so far. The Treasury is coordinating the review and will make financial reform proposals late this year, but top Treasury officials have avoided stating any opinion about the outcome of their study.

Seidman, who may be leaving his position this fall, also has been serving as chairman of the Resolution Trust Corp., which is in charge of cleaning up failed savings and loan institutions.

Seidman said banks should set up separate companies for risky lending and investment activities so that if the ventures collapsed, they would not endanger the insured money deposited in the banks' accounts. Banks would be able to use money collected from federally insured deposits only for relatively safe assets such as mortgage loans, government securities and highly rated corporate securities.

The FDIC chairman also urged Congress to:

Scrap the Glass-Steagall Act, which separates commercial banking from investment banking.

Remove Bank Holding Company Act restrictions that prevent commercial banks from affiliating with nonfinancial businesses.

End restrictions that prevent banks from opening branches or buying banks across state lines. "We should allow banks to do business in every state the same way we do supermarkets," he said.

Seidman criticized Federal Reserve Chairman Alan Greenspan's vision of revamped bank regulations, saying it relied too heavily on increasing mandatory capital requirements for banks.

"Some of the best capitalized banks in the U.S. in the early 1980s were Texas banks with average capital better than 9 percent, and nine out of 10 of those didn't survive or wouldn't have survived without our help," Seidman said. "You cannot rely on that alone as a safety factor for the insurance fund."

Seidman also said that neither the Federal Reserve nor the Treasury should be responsible for regulating commercial banks in a new regulatory environment. He said either one would have "a real conflict of interest" because of competing concerns with monetary policy and the generation of revenue. He asserted that a regulator should possess "independence and freedom from day-to-day pressures" and "political concerns."

The notion that certain banks were "too big to fail" and would be rescued by the federal government should be "reexamined and restricted," the FDIC chairman said. The policy, never stated clearly, has been assumed to be in force since the government rescued Continental Illinois Corp. in 1984.

The issue is of pressing interest because of concern about the possibility of a major bank failure in one of the nation's troubled real estate markets and because of the dwindling resources at the FDIC. Seidman said the FDIC would lose $2 billion this year, bringing the insurance fund's reserves down to about 50 cents to 60 cents for every $100 of insured deposits. That is the lowest level since the fund was set up during the Great Depression.

Several senators expressed concern that the FDIC could face a rescue of commercial banks similar to the one for the savings and loan institutions. They said they fear that Congress would then be asked to appropriate billions more.

Seidman said that "as far as we can tell now, we can handle what we can see in the system at this point," but he cautioned that "we cannot see the future perfectly." He said the fund was in a "very much stressed position."

Seidman said the FDIC would increase the premiums paid by commercial banks for deposit insurance.

He said financial reforms should have three objectives: reducing the potential liability of the government as an insurer, maintaining the stability of the financial system and increasing the competitiveness of American banks.