Banks, thrifts near battle on insurance fund.

WASHINGTON -- The battle between the bank and thrift industries is about to begin.

After three years of paying record rates for deposit insurance, the banking industry's expensive task of rebuilding the Bank Insurance Fund is nearly complete.

Once the fund has $1.25 for every $100 of domestic deposits, the Federal Deposit Insurance Corp. has vowed to slash premiums from the current average of 23 cents. The agency expects to cut its rates by mid- 1995 or early 1996; prices could go as low as a nickel per $100.

The thrift industry is facing a less happy future.

Savings and loans are not expected to see their rates come down until 2004. Fearing that the huge disparity in rates will leave them at a competitive disadvantage, thrift industry leaders are arguing for a merger of the bank and savings association insurance funds.

The California League of Savings Institutions is one power behind the industry's push. Lou Nevins, its president, claims that a combined fund would reach the 1.25% goal in 1997, just a year after the bank fund.

Cost Understated?

But, so far, the banking industry isn't biting.

Edward L. Yingling, chief lobbyist for the American Bankers Association, said thrifts are trying to minimize how much a merger would cost the banking industry.

"This is not a matter of pennies," he said. "It's a matter of asking the banking industry to pay billions of dollars to pay for the problems of one of their principal competitors."

Succeeding the busted Federal Savings and Loan Insurance Corp., the Savings Association Insurance Fund was created from scratch in 1989. In four years, thrifts have built the fund to $1.2 billion.

Through December 1993, the industry also had shelled out about $3.2 billion to pay the interest on bonds issued to fund the industry's bailout.

$5.8B Needed

For the thrift industry to hit 1.25%, it will need another $5.8 billion, according to the General Accounting Office. Industry leaders charge that the fund will never raise that kind of money once insurance rates diverge for banks and thrifts.

Thrifts will dump deposits to avoid the insurance premiums, industry officials claim. In fact, since 1989, the thrift fund's insured deposits have shrunk 21% to $696 billion. Mr. Nevins predicted that the thrift fund will implode.

But before that happens there will be a huge brawl on Capitol Hill, pitting the thrift industry against the banking industry.

Mr. Nevin said the thrifts that are thriving today had nothing to do with the industry's 1980s collapse. "These thrifts aren't any more responsible than banks are," he said.

But ABA's Mr. Yingling countered: "That doesn't mean we should pay."

Will Explain Opposition

The ABA will deliver a position paper to Congress in the next two weeks, laying out the banking industry's opposition to a fund merger.

"The main point we're going to make is there is not any emergency," Mr. Yingling said. "The SAIF fund is not in danger of collapsing."

But the ABA paper will have to compete on Capital Hill with the semiannual report of the Savings Association Insurance Fund Advisory Committee, a private-sector group that monitors the thrift insurance fund, That report will argue for a merger.

An Easy Fix

FDIC officials are convinced that the easiest answer is a merger of the funds.

"It's a simple way to fix it, though a politically unpopular way," said W. Roger Watson, FDIC's research director. Disparate rates, he said, will "absolutely" hurt the thrift industry and its fund.

Still, some thrift industry leaders are warning that a funds merger is politically impossible.

Patrick Forte, president of the Association of Financial Services Holding Companies, a trade group for large thrift concerns, said the industry should pursue other options, including legislation to divert Resolution Trust Corp. funds to the Savings Association Insurance Fund.

"There are other ways to approach the SAIF problem rather than getting bogged down with futile legislation," he said.

Industry observers are predicting a compromise that gives the thrifts a fund merger and banks a better charter.

Karen Shaw, president of the Institute for Strategy Development, predicted a merger of the funds along with a merger of the FDIC with the Comptroller of the Currency and the Office of Thrift Supervision.

"The banks will get some of the charter value of the S&L charter as a reward for being compliant with the BIF-SAIF merger," she said.

Tomorrow: Is the 1.25% ratio the right threshold for the insurance funds?

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