The government's bank insurance fund, which backs deposits at banks up to $100,000 per account, will run out of cash in the near future unless either the banking industry or taxpayers pumps tens of billions of dollars into it, a trio of economists hired by a House Banking subcommittee said yesterday.
L. William Seidman, chairman of the Federal Deposit Insurance Corp., which manages the insurance fund, agreed that a cash infusion of about $25 billion will be needed early next year "to ensure the stability of the fund." He said banks, not taxpayers, should provide the money.
But Seidman labeled as "baloney" the claim by one of the economists, R. Dan Brumbaugh, a San Francisco consultant, that unacknowledged banks' loan losses are so large and future claims on the insurance fund likely to be so big that the fund is already insolvent.
Seidman, Brumbaugh and the other two economists, Robert E. Litan of the Brookings Institution and James R. Barth of Auburn University, agreed that depositors with money in insured accounts need not worry about the safety of their money, since the insurance fund is fully backed by the U.S. government.
At a hearing before the House domestic financial institutions subcommittee, the economists, all of whom are acknowledged as experts in the banking system, put the cost of dealing with bank failures over the next three years at anywhere from $20 billion to more than $60 billion, depending on how serious the current economic slump turns out to be.
Seidman declined to estimate the fund's expenses beyond next year, during which he expects about 180 bank failures at a cost to the fund of about $10 billion. With about $5 billion anticipated from insurance premiums and interest payments in 1991, such expenses would mean the fund's current reserve of $9 billion would fall to $4 billion at the end of 1991.
"Our best assessment of the situation is that the bank insurance fund remains solvent and will be solvent at the end of 1991," Seidman told the subcommittee. "But, it is very weak. A recapitalization will be necessary."
With an infusion of new money, however, "the FDIC fund should be able to handle the problems of the next three years unless a disaster occurs," he said.
The "disaster" the FDIC chairman fears most is that the current downturn of the U.S. economy will turn into a serious recession -- a nationwide slump as bad as the one that occurred in Texas and other Southwestern states after oil prices and real estate values collapsed in the mid-1980s. The economists said a recession of that magnitude would cost the bank insurance fund more than $60 billion over the next three years.
"It is our view, however, that the report's estimate of loss, in the case of a major, deep recession, probably is too low," Seidman said.
The FDIC chairman said the Treasury and banking industry groups have agreed to a recapitalization and the banks have agreed to deal with the current problems the fund is encountering, which he said is the most urgent need.
"If it needs to be recapitalized, the banks are willing to put the necessary money into the fund," Donald Ogilvie, executive vice president of the American Bankers Association, confirmed on NBC-TV's "Today" show.
The economists all questioned whether the banking industry has the resources to provide $25 billion immediately for the insurance fund. They suggested that legislation be passed to allow the Treasury to lend the fund up to $50 billion. Brumbaugh said banks should not be expected to repay the money. The other coauthors said banks should repay the money unless industry losses turn out to be so great that they cannot.
Brumbaugh said the premium increases already likely for next year, apart from any new recapitalization plan, will take about one-third of all the profits at large banks and one-fifth of the profits at smaller banks. The premium has been raised from 8.3 cents per $100 of insured deposits to 19.5 cents beginning Jan. 1, and a further rise to 23 cents is likely.
An assessment large enough to raise the $25 billion that Seidman said is needed would be the equivalent of boosting the premium by another 12 cents and leaving it in effect forever, Litan said. A drain of this magnitude would mean the failure of more institutions that would increase the insurance fund's losses by between $3 billion and $8 billion, he said.
Many members of the subcommittee repeatedly stressed the need to make sure banks rather than taxpayers prop up the fund.
"We need to make certain that the taxpayers of this nation, who have already been forced to pay too much for the savings and loan bailout, are not asked to bail out the banks or the bank insurance fund," said the chairman, Rep. Frank Annunzio (D-Ill.).
Seidman and the three economists all said that adding money to the insurance fund should be only the first step in reforming the present system of deposit insurance and restructuring the banking system.
"Our country's banking system can operate safely and soundly only if it can provide competitive services and credit to its customers at a reasonable profit," Seidman said. "Outdated restrictions" on the services banks can provide, limits on what bank holding companies can own and barriers to full interstate banking "should be eliminated," he said.