WASHINGTON - There's no need to pump more money into the Savings Association Insurance Fund, members of the Shadow Financial Regulatory Committee said Monday.
Instead, the group of bankers, lawyers, and academics recommended raising the critical level of capital at which regulators must shut down a thrift to 4%, from 2%.
By closing thrifts earlier, while they still have plenty of capital, losses to the insurance fund would be reduced, the group argued.
"This would essentially substitute self-insurance and regulatory monitoring for the current system of deposit insurance for SAIF-insured institutions," the committee declared in a statement issued at its quarterly press conference. "The proposal also relies upon an institution's own capital to protect the insurance fund and taxpayers and would not impose a burden on other institutions."
Industry consulant Karen Shaw didn't see it quite that way. "You would also be closing a lot of institutions that might be viable," she said upon hearing of the proposal.
The committee also recommended legislation to require bank-owned thrifts to help pay for the Financing Corp. bonds issued in 1987 and 1988 to bail out the thrift insurance fund. Together, the two steps would reduce the disparity between bank and thrift insurance premiums to 11 cents per $100 of deposits, instead of the projected 20-cent gap.
"The 11 basis points may be a tolerable difference competitively," said University of Houston business professor Paul Horvitz, principal author of the proposal. If not, he added, a way could be found to pay off the $8.4 billion in Fico bonds that wouldn't involve recapitalizing the SAIF.
The Financial Institutions Reform, Recovery, and Enforcement Act of 1989 required both deposit insurance funds to build reserves equal to 1.25% of insured deposits.
The bank fund may already have reached that level, but because most SAIF premiums go to pay off Fico, Resolution Funding Corp., and Federal Savings and Loan Insurance Corp. Resolution Fund bonds, savings fund reserves aren't projected to hit 1.25% until 2002.
When Bank Insurance Fund reserves hit 1.25%, the Federal Deposit Insurance Corp. will be required by law to reduce BIF premiums to an average of 4 to 5 basis points, while SAIF premiums will remain at the current 24 basis points.
Under the shadow committee's proposal, the SAIF's 1.25% reserve requirement - which Mr. Horvitz characterized as "arbitrary" - would be dropped. Mr. Horvitz said prompt action by regulators "can keep losses at a very low level."
