WASHINGTON The American Bankers Association issued a study Wednesday predicting that the costs associated with raising deposit insurance coverage to $200,000 per account would outweigh the meager new deposits that such an increase would draw.
Though the trade group stopped short of officially withdrawing its endorsement of doubling coverage, the study clearly lays the groundwork for backing off a proposal popular with many community bankers but opposed by top policymakers. Donald R. Mengedoth, chairman of Community First Bankshares in Fargo, N.D., and president of the ABA, said in an interview Wednesday that many bankers would change their minds after reading the conclusion that a coverage hike would force them to pay higher deposit insurance premiums.
When the subject originally emerged at town meetings, we asked bankers, How many of you would like to double coverage? Mr. Mengedoth said. Virtually all the hands in the audience went up. When we asked, How many would like to do that at any cost?, there were no hands in the air. It gives one pause when you reflect on the economic and political costs.
The study released Wednesday by University of Florida professor Mark J. Flannery said that if coverage is doubled, the banking industry would add between $128 billion and $422 billion of insured deposits, an increase of 4%-13%. Approximately $246 billion of uninsured deposits in existing accounts would be covered if the limit were raised, the study said.
In an accompanying letter to ABA members, Mr. Mengedoth said that the groups government relations council had estimated new deposits would be close to 4%.
Even a modest increase would carry a high price tag, the study said. The increase in deposits would wipe out the $3 billion cushion in the funds, dilute the ratio of federal reserves to insured deposits well below the statutory minimum of 1.25%, and trigger premiums for the entire industry for the first time in nearly five years.
The industry would have to pay between 3 and 13 basis points in premiums to recapitalize the reserve fund, the study estimated.
Mr. Flannery wrote in the study that at the high end of the estimated range for deposit inflows, the banking industry would become immediately responsible for contributing $4.96 billion in additional premiums, which amounts almost to 13 basis points on the deposit assessment base.
Mr. Mengedoth said that the ABA still supports raising coverage to account for inflation, but is not committed to doubling the limit and would wait to hear responses from its members before making any firm commitments.
He said the group endorsed the $200,000 number last year because it was the only alternative under public discussion, and emphasized that ABA leaders have long been concerned about the economic and political costs of seeking higher coverage.
Indeed, lawmakers may attempt to force stronger consumer privacy requirements or mandatory, low-cost banking products on bankers in exchange for a coverage hike, Mr. Mengedoth said.
Any increase faces an uphill political battle in Congress and with regulators. Treasury Secretary Lawrence H. Summers, Federal Reserve Board Chairman Alan Greenspan, and Senate Banking Committee Chairman Phil Gramm have voiced opposition to doubling the insurance limit. Mr. Summers and Mr. Greenspan argued that a coverage hike helped cause the thrift crisis of the 1980s, and would undercut efforts at market discipline.
As alternatives, Mr. Mengedoth said, the group is considering separating coverage of municipal deposits from other accounts. One possible solution could be requiring banks to pay a supplemental premium for 100% coverage of any municipal deposits, he said.
The study found that approximately 67% of individuals and 50% of small-business owners said that the current limit is high enough. Only 19% of individuals and 27% of small-business owners said they would move their money from other investments to insured deposits if the coverage level is increased.
At least one supporter of increased coverage questioned the validity of the ABA study. Kenneth A. Guenther, executive vice president of the Independent Community Bankers of America, said that the study did not take into account the fact that the Federal Deposit Insurance Corp. suggested new ways to charge premiums in its options paper released in August.
The current predictions are based on glowing economic times, and more new deposits may come into the system in an economic downturn, he said.
Mr. Guenther said that he did not expect the ABA to withdraw its support of a coverage hike. I dont think community bankers will let them abandon this issue. The liquidity problem is real. Whats the alternative, ABA? Greater dependence on Home Loan bank advances?
Other industry groups said the ABA study supports their own findings.
Diane Casey, president of Americas Community Bankers, said an informal survey by the group found that insured deposits would likely rise 3% if coverage were doubled. Her group was one of the few banking groups that has not endorsed doubling coverage, but instead has suggested indexing the coverage limit to inflation from 1974, which would increase it to approximately $140,000.
Congress would never give us something without charging a price, and doubling coverage would be a very costly source of new funding, Ms. Casey said. The ABA had to rethink its position.