WASHINGTON - Banks would start paying again for deposit insurance, if an independent consultant hired by federal regulators has its way.

In a paper released Tuesday, the New York firm Oliver, Wyman & Co. said the current system does not differentiate risk well enough, allows new and quick-growing institutions to get a free ride on the backs of banking companies that prepaid insurance in the early 1990s, and does not have enough of an analytical or market basis for setting prices. "Deposit insurance should be priced each year at least at the level of expected loss for every bank," said Andrew Kuritzkes, vice chairman of Oliver Wyman.

Currently, almost 93% of banks fall into the top category in the FDIC's risk measurement system and therefore pay nothing for deposit insurance. The Oliver Wyman plan would throw out the current method and ensure that banks pay premiums again for the first time in four years.

Banking industry officials, whose opinions vary about many aspects of reform, are united in opposition.

"We believe the current system, while not perfect, is working reasonably well," said Edward L. Yingling, chief lobbyist for the American Bankers Association.

"The risk-based system is designed to automatically increase premiums if economic conditions deteriorate. Putting the best institutions under a microscope is likely to miss what the plain eye can see - that it's the problem institutions that already exist that deserve FDIC scrutiny. Our nation should take comfort in the fact that almost 93% of the banks are in the best-rated category."

Oliver Wyman proposed using a formula to set premiums that would factor in the likelihood of default, insured deposits, and how much the FDIC would expect to lose if a failure occurred.

The so-called "expected default frequency" could be calculated based on traditional tools used by regulators such as the risk profile of an institution, capital, and other financial resources, and the quality of the management. The paper said that market indicators also could be used such as credit ratings or the price of uninsured deposits, subordinated debt, interest rate swaps, or equity.

The formula would take into account the amount of insured deposits, Mr. Kuritzkes said, to prevent a large institution such as Merrill Lynch & Co. from dramatically increasing insured deposits without paying more premiums.

The third component of the formula would be the cost of the loss to the FDIC if a particular bank failed, expressed as a percentage of the total number of insured deposits. That number could vary by bank depending on geographic and product line diversity, loan concentration, or the structure of liabilities.

In an example given by Mr. Kuritzkes, he used an institution with a $100 million of insured deposits that has an A- credit rating by Standard and Poor's, which he said would have a one-in-a-thousand chance of failing under his company's formula. If the FDIC determined that bank would cost 20 cents for each dollar of insured deposits if it failed, Mr. Kuritzkes said, the bank would be charged $20,000 - or 2 basis points - each year.

That figure is considerably lower than 23 basis points, the amount each bank would be charged now if the ratio of federal reserves to insured deposits fell below the statutory minimum.

However, Mr. Kuritzkes cautioned that his company is not suggesting an individual risk price for each institution and that it has yet to outline how the FDIC would group similar banks into categories that would be charged the same premiums.

That lack of detail worries some industry representatives.

"They have a theory," said Karen Thomas, director of regulatory affairs for the Independent Community Bankers of America. "But they didn't put any meat on the bones" - in other words, show how it would be implemented.

But Mr. Kuritzkes contends that the system presents several advantages.

"A lot of forward-looking bankers would be in favor of this," he said. "The system is essentially self-financing, and is a lot more timely than the current one, which has banks paying a lot of money when they can least afford it."

But early indications from industry representatives, who got a glance at an excerpt from the proposal in the FDIC "options paper" released last week, were not favorable.

Diane Casey, president of America's Community Bankers, said the proposal raises more questions than it answers.

"Too much information could skew the market," she said. "The pricing bracket for the institution will be publicly available. That could have unintended consequences in the marketplace, because it might allow the market to make judgments that are wrong."

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