The megamerger deals of the last two weeks are breathing new life into proposals to reshape deposit insurance.
"This raises the stakes and adds a degree of urgency that didn't exist earlier," said Gary H. Stern, president of the Federal Reserve Bank of Minneapolis and a passionate advocate of deposit insurance reform.
The topic is grabbing center stage because the proposed Citigroup and BankAmerica would be so massive that few could deny they would be "too big to fail," which means the government would bail out all depositors- regardless of the $100,000 insurance limit-if the institution went bankrupt.
This implicit government guarantee means that depositors, even those with millions of dollars at stake, would not need to monitor an institution's health because their funds would be fully protected.
Rep. Marge Roukema, chairman of House Banking's financial institution's subcommittee, said the recent mergers have convinced her to hold a hearing next month on the "too big to fail" doctrine and deposit insurance reform. "That is a legitimate question that should be up for full public discussion," the New Jersey Republican said.
Mr. Stern's solution is to revamp deposit insurance so the government would never fully compensate depositors who keep more than $100,000 in a bank, even if the institution is too big to fail.
Under his proposal, the Federal Deposit Insurance Corp. would cover 100% of the first $100,000 a depositor has in a failed bank, and 80% on all additional sums.
The Stern proposal also would change the way banks pay for deposit insurance. Premiums would be based on the rate the market charges each bank for short-term debt. This is intended to force banks with riskier portfolios to pay higher insurance premiums. He also would require banks to disclose more data on asset quality.
A competing plan by the Bankers Roundtable would eliminate the "too big to fail" doctrine and privatize deposit insurance.
A third alternative, advocated by banking consultant Bert Ely, president of Ely & Co., would replace deposit insurance with a new system of cross guarantees. Under this regime, other banks, pension funds, and institutional investors would agree to guarantee all of a bank's deposits in exchange for premiums and the right to examine the bank's investment practices.
"The size of these emerging institutions is so great as to render absurd the notion that these institutions, if they get into trouble, can be resolved in a manner that imposes losses on uninsured depositors and other creditors," Mr. Ely said. "Instead, other types of risk-sharing methods need to be explored."
The call for reform garnered support from industry officials.
"The case for considering further reforms in deposit insurance is rather compelling," said E. Gerald Corrigan, a former Federal Reserve Bank of New York president who is now managing director at Goldman, Sachs & Co. "This is a very good opportunity to consider a range of ideas."
But FDIC officials insisted these new banking behemoths may actually reduce the risk to the deposit insurance fund because they would be less affected by regional economic downturns.
"We saw in the 1980s that a lot of the failures we encountered were regional in nature," said Arthur J. Murton, director of the FDIC's division of insurance. "To the extent that you have banks that are national in scope, you can have some of the benefits of diversification, and you don't have them exposed as much to any regional set of problems."
