CBO Says Banks Can Pay Premium Of 40-50 Cents

WASHINGTON -- The Congressional Budget Office said an increase in deposit insurance premiums to 40 or 50 cents per $100 of deposits would have little impact on the rate of bank failures.

The budget office, which had earlier said the industry could afford premiums as high as $1 per $100 of insured deposits, said the 40- to 50-cent level would result in less than 10 to 15 additional failures through 1996. The CBO delivered the findings to the Senate Banking Committee. The American Banker reported the outlines of the conclusions on May 7.

Some Back a 30-Cent Cap

The findings contradict assumptions by experts who see any rise above 30 cents per $100 as damaging to the industry. The Federal Deposit Insurance Corp. is raising the bank rate to 23 cents at midyear from 19.5 cents.

The Bush administration has proposed a 30-cent cap, which is seen by FDIC Chairman L. William Seidman as an absolute maximum.

"I'm surprised CBO would say that," said James Barth, finance professor at Auburn University. A sizable premium hike, he said, "pushes institutions closer to insolvency and makes the more profitable, well-capitalized institutions less competitive with other financial servicers."

Passing the Cost Along

"If banks were able to pass through 100% of the premium change to their customers, then there would be no change in the banks' earnings or equity," a CBO staff memorandum said. "If banks cannot pass through any of the premium increases, bank failures and [insurance fund] losses may be quite large."

The CBO projected that 765 banks would fail from 1991 to 1996 at a 50-cent premium, with half the premium's cost passed on to customers. By comparison, 748 would fail if premiums were held at 23 cents.

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