WASHINGTON - Proponents of private deposit insurance are hoping the Republican push to shrink government will create a more favorable climate for their plan, which withered in prior legislative sessions.
Rep. Scott Klug, R-Wis., the party's point man on legislative efforts to downsize the federal government, endorsed a bill last week to replace federal deposit insurance with a system of "cross-guarantees" under which groups of depository institutions would insure each other.
Rep. Klug said the plan will be included in a package of GOP proposals to reduce the federal budget by farming government programs out to private industry.
The legislation, sponsored by another Wisconsin Republican, Rep. Tom Petri, would shift the risk of large-scale bank or thrift insolvencies from the federal government to a broad coalition of financial institutions, insurance companies, and other private-sector deep pockets.
Rep. Petri said it would give banks greater regulatory flexibility and put them on even competitive footing with unregulated rivals.
"This legislation will prevent future taxpayer-financed deposit insurance bailouts, prevent both credit crunches and bouts of overlending, and create a sounder and more efficient banking industry, all to the immense benefit of our economy," Rep. Petri said last week.
While the legislation may fit the Republicans' objectives, the banking community generally opposes such a radical change.
"We don't support it because we don't think it's a realistic approach to deposit insurance," said Ron Ence, director of legislative affairs for the Independent Bankers Association of America. Mr. Ence questioned whether enough guarantors would be available to support the proposed system.
James Chessen, chief economist for the American Bankers Association, said the plan offered scant improvement in regulatory flexibility over the existing risk-based premiums.
Interest among banks in revamping the deposit insurance system is particularly low now, he added, because the industry just finished a costly recapitalization of the Bank Insurance Fund.
"The banking industry has paid over $5.5 billion per year for the last five years" to rebuild the bank fund, he said. "Why should we be thinking about a radical change in the deposit insurance system?"
Banking consultant Bert Ely played a key role in developing the plan. He explained in an interview that the legislation would eliminate federal deposit insurance and establish a system under which every depository institution would obtain private policies on terms negotiated with a syndicate of guarantors.
Banks, thrifts, insurance companies, pension funds, endowment funds, and any other entity or individual with a net worth of $100 million would be eligible to participate in the system as a guarantor.
A "syndicate agent" acting on behalf of the guarantors would monitor the bank's compliance with the safety and soundness standards set forth in the insurance contract. The Federal Deposit Insurance Corp. would continue to exist, but merely to ensure that all institutions obtain private insurance.
Premiums and safety and soundness standards negotiated between a bank and its guarantors would better reflect the particular risk profile of the institution than the current system, Mr. Ely said.
"We've estimated that there is as much as $7 trillion in equity capital available to participate in the system," Mr. Ely said.
The Petri bill is the fourth legislative attempt to privatize deposit insurance in the last three years. Previous bills all died in the House Banking Committee, and Mr. Ence predicted a similar fate for this year's version.
Banking Committee Chairman Jim Leach has not taken a position on the current bill, but has in the past expressed skepticism toward private deposit insurance. Rep. Marge Roukema, R-N.J., who heads the subcommittee that would review the bill, dismissed the plan as impractical.
"I don't see any way we can privatize the FDIC," she said.
Backers acknowledged the lack of committee support, but noted that prominent House Republicans such as majority leader Dick Armey support privatizing deposit insurance.
"We think this thing fits in perfectly with the 'Contract with America,' " Mr. Ely said.
Mr. Cahill writes for Medill News Service.
