Federal Reserve Chairman Alan Greenspan said yesterday that while the insurance fund that protects bank deposits is under "severe stress" and needs major reforms, a repeat of the savings and loan crisis is highly unlikely.
"The chance of having the type of problems with the banks that we had with the thrifts is very significantly lower," Greenspan told members of the House Banking Committee, citing the stronger condition of the banking industry.
Greenspan's testimony came after the release of two independent reports this week that said the bank insurance fund needs to be bolstered because a recession or the failure of one of the country's biggest banks could wipe it out. The fund, which began the year with $13.2 billion in reserves, is used to pay off depositors when a bank fails. If the bank fund runs out of money, as the insurance fund for S&Ls did last year, tax dollars would likely be used to pay the depositors.
Greenspan said the bank fund, now at its lowest level ever, "likely will remain under stress for some time to come" and would face even more pressures if the real estate market weakens further or the nation enters a recession. He endorsed proposed legislation that would give the Federal Deposit Insurance Corp. authority to raise premiums that banks pay into the insurance fund.
But Greenspan cautioned lawmakers not to take hasty actions that could trigger more bank failures -- such as raising the bank premiums too high. Instead, Greenspan urged Congress to focus on long-term changes in thegovernment's deposit insurance system. An overhaul of the system has been widely discussed in the wake of the S&L debacle to limit the taxpayers' exposure to bank losses and encourage more prudent lending practices by financial institutions.
Critics say the present system, which insures deposits up to $100,000 in an account, invites bank and S&L executives to take risks they would not assume if they were lending their own money.
Greenspan said the most important reform would require higher levels of capital, or net worth, before financial institutions could receive government insurance. That would cause bank owners to act more prudently because "more of their own money would be at risk," he said.
Greenspan also endorsed increased supervision of banks and thrifts. But he hedged on a number of other possible reforms, including reducing the government's insurance ceiling below $100,000 per account and limiting insurance to one account only.