In less than half an hour yesterday, the House of Representatives approved one of the biggest changes in federal deposit insurance in half a century.
Without any hearings or even a dissenting voice, the lawmakers agreed to give the Federal Deposit Insurance Corp. the unrestricted right to raise the insurance premiums that banks pay to guarantee that depositors will get their money when banks go broke.
The rapid approval of a measure that banking experts say never would have passed a year ago and was not even being discussed a month ago showed the stunning speed with which the issue of deposit insurance has become a top political priority.
"It really pushes the deposit insurance reform issue to center stage," said Brookings Institution banking expert Robert Litan. "Congress is on red alert," he said, as the result of warnings from the General Accounting Office and the Congressional Budget Office that the FDIC's insurance fund has been so weakened by bank failures that one big bank bankruptcy or a spate of little ones could wipe out the fund.
Immediate action was needed to assure that the bank deposit insurance fund will not need the same kind of taxpayer bailout that is now paying for the $300 billion cleanup of the savings and loan industry, said House Banking Committee Chairman Henry B. Gonzalez (D-Tex.) and Chalmers P. Wylie (R-Ohio), the committee's ranking Republican, who cosponsored the bill passed yesterday.
Under the House measure, the existing limits on insurance premiums that the FDIC may assess banks would be eliminated, along with restrictions on annual increases in those premiums. Current law prohibits the FDIC from charging banks more than 32.5 cents per $100 in deposits and bars increases of more than 7.5 cents per $100 in deposits. A parallel measure has already been introduced by Senate Banking Committee Chairman Donald W. Riegle Jr. (D-Mich.) and is scheduled for a hearing next week.
The action will not solve the problems of the deposit insurance program and may even make them worse, industry experts said, but it will allow lawmakers to go home for the November election campaign, confident that the deposit insurance system will not fall apart while they are out of town.
And it will make it possible for incumbents in Congress -- who might have limited the cost of the S&L rescue by acting more decisively years ago -- to assure constituents that they have taken action to prevent the same thing from happening to the banks.
The rapid House action reflects what Alexandria S&L expert Bert Ely calls "the never-again mentality" that Congress has adopted as a result of the embarrassing and costly S&L collapse.
"It is driven by fear, raw fear on the part of the regulators and the Congress," said Ely. "They are afraid of the voters." Instead of simply raising deposit insurance premiums, Congress ought to overhaul the entire system, he added.
And rather than reassuring voters, the unexpected, undebated drive to do something about deposit insurance may only add to their uncertainty, cautioned Ely. "It's got to undermine confidence. When you clearly see hysterical actions, that doesn't build confidence."
Concern that the congressional action will be counterproductive is widespread in the banking industry.
"I think it passes the wrong signal. It further creates the impression that something is rotten in the state of Denmark. I really don't think the FDIC fund is in any trouble at this time," said Kenneth Guenther, executive vice president of the Independent Bankers Association of America, the trade organization for small banks.
"It is very important they don't start playing with the system in a way that would undermine confidence," agreed Edward Yingling, executive director of government relations at the American Bankers Association.
Neither the ABA nor the independent bankers group is lobbying against the FDIC premium increase bill. Part of the reason is that they know they can't stop it and another part is that they do not want to be blamed for blocking action to protect the taxpayers.
Giving the FDIC power to raise premiums "is not something we're going to oppose," said Yingling, "but we'd rather they did it as part of a comprehensive reform."
Though part of any increase in deposit insurance premiums will surely be passed on to customers in the form of higher fees or lower interest rates, much of the money will have to come out of the pockets of bankers.
Both banking organizations and private experts Litan and Ely agree that raising FDIC premiums too high will undermine the finances of banks, a view shared by Federal Reserve Board Chairman Alan Greenspan.
The best way to protect taxpayers against the cost of bank failures is to require bankers to put up more of their own money as capital to cover any losses, Greenspan told the House Banking Committee last week. Every additional dollar that banks pay for deposit insurance is a dollar they cannot invest in building their capital, Greenspan cautioned.
Ely said Congress is in such a panic that it is taking hasty action "that could kill the banks in the process."
But Litan believes the sense of urgency is necessary. "You can't get Congress to do anything without sounding the alarm," he said. "The alarms that are going off now are positive. They will encourage Congress to move at a much earlier stage. They are now primed to do something quickly -- a short-term fix with the full awareness they will have to do something more."