Leach Rebuts Criticism of U.S. Deposit Insurance

House Banking Committee Chairman Jim Leach rejected calls Thursday to scrap federal deposit insurance.

"The case for significantly changing deposit insurance rules at this time is totally uncompelling," the Iowa Republican said. "The current system is strong. It is working well. It is tampered with at significant risk."

Rebutting Rep. Leach during a daylong symposium, Norwest Corp. chairman and chief executive Richard M. Kovacevich said the government's guarantee should be replaced with a privately operated system.

"An important segment of the financial services industry will be smothered by the shield that was meant to protect it," he said. "If you look at the marketplace, uninsured financial services providers do not face the same regulations and obligations."

Mr. Kovacevich blamed federal deposit insurance for a litany of evils, including the savings and loan crisis and the flight of assets from the banking system.

The opposing comments highlight an industrywide debate that has gathered steam in recent months. Mr. Kovacevich, a longtime advocate of reform, has pushed the Bankers Roundtable out front on the issue and even gained some support from regulators such as Minneapolis Federal Reserve Bank President Gary Stern, who is advocating milder reforms.

On the other side are the vast majority of executives of smaller banks, including Thomas E. Hales, chairman and chief executive officer of Union State Bank in Orangeburg, N.Y.

At the symposium, Mr. Hales called Mr. Kovacevich's plan to end the current practice of bailing out large institutions a "fallacy and a self- serving delusion of large banks."

"No developed industrial nation in modern history has allowed its large banks to fail, and the U.S. will be no exception," Mr. Hales said.

Though the debate is heating up, the issue has yet to catch fire.

Thomas M. Hoenig, president of the Federal Reserve Bank of Kansas City, said that despite his support for changes to the system, "I have not found a lot of public support for reform of the safety net."

But Mr. Kovacevich said that without reform, deposit insurance will make the industry less competitive. Banks hold only 20% of the country's financial assets, he noted. "People will continue to take their business to less expensive providers, and commercial banks will become less relevant."

But Rep. Leach said bankers are wrong if they think getting rid of deposit insurance would lead to less regulation.

"The well-being of the economy and public depend on prudential and fair credit practices," Rep. Leach said. "Policymakers-whether right or wrong- believe banking is too important to be left simply to bankers, because, among other things, public treasuries would be tapped if the banking system collapsed."

Rep. Leach advised bankers to focus their energy on enacting legislation he has sponsored that would tear down the walls separating the banking, securities, and insurance businesses.

"The financial services industry is evolving at a rapid pace, and legislation is needed to reflect marketplace changes and to set the ground rules for the next generation of change," he said.

Mr. Kovacevich complained that financial reform has been stymied by deposit insurance; lawmakers fear expanding bank powers because they are backed by the government. "I am willing to give up deposit insurance in order to allow us to compete," he said.

The current system is unnecessary because banks can insure individuals' deposits up to $100,000 with a private system, he said. Larger depositors and banks stockholders should be forced to absorb losses when an institution runs into trouble.

If a failure is large enough to panic the entire financial system, he argued, Congress should be forced to approve any bailout, as it did with Chrysler Corp. in 1978.

For reprint and licensing requests for this article, click here.
MORE FROM AMERICAN BANKER