Congress Has Largely Ended Deposit Insurance Subsidy

To the Editor:

Warren Heller's criticism ("It Sure Looks Like a Subsidy to Me," June 17 page 7) of my commentary explaining why deposit insurance is not subsidized ("Greenspan's Deposit Insurance Subsidy Argument Is Nonsense," June 6, page 3) does not properly account for the causes of U.S. banking problems and material changes in the industry.

First, the problems Mr. Heller cites were rooted in faulty public policies that Congress has largely rectified, notably by eliminating branching restrictions and enacting prompt corrective action to prevent regulatory delay in closing failing institutions. Therefore, future deposit insurance losses should be minimal, even during times of great economic stress.

Second, Congress gave the FDIC a blank check on the earnings and capital of healthy banks and thrifts to pay for future regulatory errors. Consequently, deposit insurance does not pose a taxpayer risk today. In fact, the government's safety-net activities net it $2 billion annually from reserve requirements and the $35 billion non-interest-bearing advance banks and thrifts have made to the FDIC.

Despite its past actions, though, Congress needs to fundamentally rethink how it protects depositors, healthy institutions, and the taxpayer from future regulatory errors.

Bert Ely

Principal, Ely & Co. Alexandria, Va.