WASHINGTON -- The Senate Banking Committee is expected to reject a Clinton administration budget reduction proposal that critics say would increase losses for uninsured depositors when a bank fails.

A week ago, the Senate panel appeared ready to join its House counterpart in seeking to raise money by taking surplus funds from the Federal Reserve and giving the Federal Deposit Insurance Corp. and depositors a preference over all other creditors in splitting the assets of failed institutions.

That plan was offered as a substitute for the administration's earlier proposal to raise money by assessing state-chartered banks for the cost of examinations.

Intervention by Fax

A day before the Senate Banking Committee was ready to vote, however, the administration faxed over a letter objecting to the idea of taking the Fed's surplus. Instead, the Treasury and Office of Management and Budget recommended limiting the depositor preference to exclude uninsured depositors.

Community bankers objected strongly to the administration proposal, arguing that it would drive uninsured depositors to larger institutions deemed too big to fail.

"Under the OMB-Treasury proposal, the uninsured depositor in a failed community ban or thrift would be at risk of losing everything," said Kenneth A. Guenther, executive vice president of the Independent Bankers Association of America, in a letter to Senate Banking Committee Chairman Donald W. Riegle, D-Mich.

"If the OMB-Treasury proposal is adopted," he added, "depositor confidence will be further weakened, and additional deposits will flow from community banks and thrifts into mutual fund - and, in the specific case of California, into too-big-to-fail institutions like Bank of America."

Following the House's Lead

Frank Newman, the Treasury undersecretary who proposed limiting the depositor preference, hails from Bank of America.

Congressional and industry sources said it now appears that the Senate Banking Committee will adopt a budget reconciliation measure similar to the one passed by the House -- treating insured and uninsured depositors alike.

"The common wisdom coming out of the Senate is that they will take the House language, with perhaps some tinkering," said Edward L. Yingling, chief lobbyist for the American Bankers Association. A senior Senate aide offered the same assessment.

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