The elimination of deposit insurance premiums on Jan. 1 could significantly change banks' fund-raising choices.

Free deposit insurance could spark a revival in U.S. banks' use of the institutional certificate of deposit market and make retail deposits more cost effective, experts say.

With reserves now in excess of the required 1.25% of deposits, the Federal Deposit Insurance Corp. lowered the rate for most banks from 23 to 4 basis points, or 4 cents per $100 of deposits, in September, and will eliminate the fee on Jan. 1 for 92% of U.S. commercial banks.

"It makes deposits much more viable for banks to issue," said Frank W. Hamilton 3d, managing director at Smith Barney Inc.

The firm recently sent a letter to clients spelling out the changes and advocating a revival of deposit notes. These were insured deposit products that were sold to corporate investors in the mid-1980s, before deposit premiums started to skyrocket.

Mr. Hamilton said he and Hans Bald, a Smith Barney vice president, developed the deposit note while they were at Merrill Lynch. Their 1986 program for First Interstate Bancorp's main unit in California was the first of about 40 large deposit note programs.

The deposit notes made it easier for banks to raise money in maturities greater than one year by repackaging them for corporate investors, who did not typically invest in deposits because of the way the yield was calculated.

As deposit insurance premiums rose from 8 to 23 basis points, however, Mr. Hamilton and Mr. Bald advised most banks to set up bank note programs as a cheaper alternative.

Bank notes are senior, unsecured promissory notes issued by U.S. banks. They are not insured by the FDIC, and are classified as "other borrowed money," not as "deposits," on the banks' financial reports to regulators. Since institutional investors buy far more than the $100,000 that would be insured, the bank notes are practically as cheap to issue as the insured deposit notes.

Units of Bankers Trust New York Corp., J.P. Morgan & Co., and Republic New York were among the early issuers of underwritten bank notes. The first continuously offered note programs were set up in 1988 by Bank of New York and U.S. National Bank of Oregon, a unit of U.S. Bancorp.

The elimination of the deposit insurance premium does not completely eliminate the advantages of a bank note program, Mr. Hamilton argued. The note market is highly liquid, and it could be costly to replace the existing programs at most of the 50 largest bank holding companies.

What's more, Mr. Hamilton noted in the letter to clients, the premium could be reinstated - in the event of a crisis in the banking industry, for example. And an assessment of 2 to 3 basis points on bank deposits to help pay for the thrift bailout probably will be approved in Washington, partially offsetting the elimination of the premium.

The arguments for a revival of deposit notes and CDs have persuaded most of the fund managers Mr. Hamilton has contacted to say they intend to increase their use next year.

Because rating agencies usually grant a rating one notch higher for deposits, Mr. Hamilton said cost of issuance could be significantly cheaper, especially for lower-rated banks.

"The importance given to deposits versus other forms of debt by the regulators, rating agencies, and equity and fixed-income research analysts is material," Mr. Hamilton wrote. "We also feel the investor base for deposit notes and institutional CDs is 10% to 15% deeper than the investor base for bank notes."

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