Posted on 05/29/2002 11:59:51 PM PDT by ThePythonicCow
Incredibly, Congress is considering raising the current deposit insurance ceiling for banks from $100,000 to $130,000 for individual bank deposits and to $260,000 for certain types of retirement accounts. This move should be stopped. The last time Washington hiked the limit (in 1980, from $40,000 to $100,000), it helped fuel the catastrophic savings and loan collapse. A mini-industry grew from brokers who sold high-yielding bank CDs. Customers did not care about these institutions' financial soundness; after all, Uncle Sam was guaranteeing the deposits. These banks, particularly the S&Ls, went on a lending binge.
Small banks say they need higher insurance to compete more effectively. It's hard to see why. Many of them are more profitable than their larger, oft-hidebound, brethren and are growing faster. Moreover, large banks will also get the increased coverage. Depositors who find the $100,000 limit confining can easily spread their money into CDs at other banks. Anyway, the average bank account today is well below $100,000, and only about 2% of bank deposits are not covered by insurance.
The Federal Deposit Insurance Corp. is willing to see the ceiling boosted if it gets more flexibility in setting deposit insurance premiums. Currently, premiums must go up if FDIC reserves fall below 1.25% of outstanding insured deposits. The FDIC says this means that during bad times it would have to exact more money from the banks. But isn't this what usually happens to insurance policy prices after a disaster? If Congress wants to give the FDIC flexibility to have the reserves range between 1% and 1.5%, it should do so in separate legislation. But legislators should know full well what would happen if there were not hard and fast rules on premiums: Regulators would be under pressure to keep premiums and reserves low. In a crisis, the taxpayer would be left holding the bag. Which is exactly what happened with the S&Ls.
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