In my last column I wrote about the differential between the insurance premiums banks will soon be paying to the Bank Insurance Fund and the much higher premiums thrifts will be paying to the Savings Association Insurance Fund.
Since the government created the SAIF problems, it has a responsibility to fashion a solution that both banks and thrifts will find acceptable.
I believe most bankers feel strongly that banks have no legal or moral responsibility to help the thrift fund. They believe that banks have honored the deal they made with the government to rebuild the bank fund, and that now the government must live up to its end of the bargain and reduce bank insurance premiums as promised.
But at least some bankers are able to move the discussion beyond that point.
An executive from a leading bank recently framed the issue thus:
His bank has determined the present-value cost it would bear if all banks and thrifts were required to service the Fico bonds as $140 million, or $3 per share. If the company's price/earnings ratio could be increased by just one digit, he said, it would mean considerably more than $3 per share to shareholders.
His company is willing to lay out the $140 million if the legislative package contains benefits that will bring no less than $140 million of value to his shareholders.
What kind of package would that be? In his case and probably in the case of many other bankers, insurance powers would go a long way.
Other banks, particularly the larger ones, would find repeal of the Glass-Steagall Act very appealing. Community banks could get quite excited about a small-bank exemption from Community Reinvestment Act.
All of these are things that should be done anyway, and they likely will get done in the not-too-distant future. By accelerating the timetable on some much-needed reforms, Congress and the administration might be able to put to rest the very thorny BIF/SAIF issue.
There are also some things that can be done to bring the dollars involved in the debate to a more manageable level. For starters, the requirement that the bank fund and the thrift fund be maintained at 1.25% of insured deposits can be lowered, say to 1%.
There is nothing magic about the 1.25%. It represents roughly the average level of the Federal Deposit Insurance Corp. fund during its first 50 years of operation. But a number of things have changed in recent years that suggest the level should be reduced:
*First, we have a federal depositor preference statute that will lower significantly the FDIC's losses when a bank fails.
*Second, banks are now able to diversify geographically, which will reduce the likelihood of bank failures. Roughly 85% of the failed-bank assets during the decade of the 1980s were in just four states that experienced severe regional economic downturns.
*Third, the FDIC now has an early intervention-tool, which should reduce the FDIC's losses. A bank can be closed even though it has positive net worth.
*Finally, the insurance funds are on a pay-as-you-go basis. Bank and thrift premiums can be set at any level required to cover losses.
None of these factors was present during the FDIC's first half century, and none of them was taken into account in setting the 1.25% level.
The Resolution Trust Corp. will likely have some $10 billion to $15 billion of appropriated funds that it will not need to spend on S&L cleanup activity. Some argue those funds should be given to the thrift fund.
There is certainly justification, considering the government's role in creating the SAIF's problems. Moreover, Congress promised that Treasury would provide up to $32 billion to the thrift fund if needed, and then withdrew the authorization.
The trade group for the thrifts has suggested a less difficult way to put the RTC funds to use: The RTC's funds, it suggests, should remain available in an amount sufficient to cover potential losses in SAIF-insured institutions identified as problems at Dec. 31, 1997.
In other words, the RTC funds would be available to complete the job the RTC was set up to do.
Apparently a number of things can be done to resolve the thrift fund's financial problems in a way that's fair and equitable to banks and thrifts and will serve the public interest.
A solution requires, most of all, that policymakers accept the fact that neither the banks nor the surviving thrifts have any responsibility to clean up a mess the government created.
Mr. Isaac, a former chairman of the Federal Deposit Insurance Corp., is chairman and chief executive officer of Secura Group, a financial services consulting firm based in Washington.
