WASHINGTON - You can't micromanage fish.
Early in his ownership of a 75-gallon saltwater aquarium, Federal Deposit Insurance Corp. chief of staff Mark Jacobsen would clean the tank and change the contents each day in a losing battle to keep its inhabitants alive. He has since learned to adjust his approach, taking a lighter touch.

"All I have to do is feed it and add distilled water every day or two," Mr. Jacobsen said. "I can go for weeks with nothing more because everything is in balance. The live rock and the bacteria sort of take care of all the ammonia and nitrates that the fish create," and other pollutants are eaten by the crabs.

Since joining the agency nearly a year ago from Deutsche Bank, he has sought a similar balance between government regulation and market forces in helping FDIC Chairman Donna Tanoue advance deposit insurance reform and proposals to streamline capital requirements for community banks.

"Everything that we do in the public sector is a matter of balance and trying to align market incentives with government objectives," Mr. Jacobsen said. "Our ultimate responsibility is always to the public interest. At the same time, a lot of harmful things have been done to the industry in the name of the public interest. It's finding the right balance and hopefully trying to find solutions where the market can help you achieve what you want to accomplish."

Yet critics have complained that Ms. Tanoue's approach to reforming deposit insurance is out of whack.

The agency released an 84-page "options" paper in August that detailed alternatives for changing the system, including different ways to price premiums or tie the coverage level per account to an index such as inflation. But some observers and industry officials have knocked the agency for declining to endorse any specific proposals, with the lone exception of merging the bank and thrift funds.

Mr. Jacobsen defended the FDIC in a recent interview, saying agency officials did not want to release a series of proposals without input from the industry or consumers because they needed to develop support for any plan first.

"The industry is all over the place on this," said Mr. Jacobsen, who was chief of staff for five years at the Office of the Comptroller of the Currency before joining Deutsche Bank predecessor Banker Trust Co. as a managing director in 1998.

"We needed to make a significant effort to try and develop some sort of consensus around a few core ideas. Our own internal staff is all over the board on some of these issues. The best thing to do was to frame these issues, have a public debate about them, as opposed to us coming out with them."

Some also have accused the agency of having a secret agenda. They have claimed that the agency wants to charge premiums again, arguing that both options for managing the insurance funds would likely include an increase in payments.

The so-called "user fee" option would charge all banks a small premium based on their expected loss to the insurance funds, while the mutual model would have banks maintain a percentage of their deposits in the fund.

But Mr. Jacobsen countered that a mutual fund does not necessarily ensure more premiums. If a bank's deposits rose, it would have to put more into the fund, but if its deposits fell, it would receive a refund. If the deposits remained unchanged, the bank would not make any contributions.

"To say we want banks to pay more would be really inaccurate," Mr. Jacobsen said.

He acknowledged that it could be tough to achieve harmony among industry and policymakers on specific proposals. An option to double deposit insurance to $200,000 per account has met with stiff opposition from Senate Banking Committee Chairman Phil Gramm, Federal Reserve Board Chairman Alan Greenspan, and Treasury Secretary Lawrence H. Summers.

Mr. Jacobsen stressed that the agency will do everything it can to move the effort forward. He said the FDIC has hired the Gallup Organization to conduct a survey, due in December, of consumer attitudes toward deposit insurance. He said the survey would attempt to estimate the increase in insured deposits under a higher coverage level.

The FDIC also will provide more explanation for some of the ideas outlined in the paper, such as the mutual model.

"It's our job to come up with a mutual model and not just one that is described in two pages in an options paper, but a real hard-working model," Mr. Jacobsen said. "We decided we really need to put a mutual model on the table that people can chew on. Between where we are today and where we will be, we are going to see a lot more information come out. We expect it to be a very busy fall."

Mr. Jacobsen declined to predict what the final recommendations due early next year might say. The agency will offer a sound plan based on public discussion, he said.

"This is not going to be a March surprise," Mr. Jacobsen said. "Nobody is going to be shocked. I'm not expecting any bad reactions. But will there be some people who like it and some people that don't like it? Yes. Will we necessarily have hard set-in-stone options or recommendations for every possible nuance? No."

While deposit insurance reform gets most of the attention, Mr. Jacobsen said the agency is also looking at several other issues, including how to simplify capital standards for small banks. Ms. Tanoue, in a speech last month provided a glimpse of an upcoming interagency proposal that would offer three alternatives for simplification. Those options are: a standard capital-to-assets leverage ratio, a simplified risk-based capital ratio, and a modified leverage ratio that would take into account off-balance-sheet assets.

Mr. Jacobsen said the agency needed to be out in front for these revised standards because most of the banks it regulates are smaller institutions that would benefit from simplified capital rules.

"This is something we are going to push and we are going to drive," he said. "This is an interagency thing, but we are really going to push. This is important to us and important to our banks."

A preliminary proposal is expected to be released Oct. 17, with the agencies seeking comments on how it will affect banks. Mr. Jacobsen said the tricky part will be making the process simpler, while not threatening safety and soundness.

"It is a matter of balance and we really need to get some industry input as to that balance," he said. "I envision we will be going out in the wintertime and spring to try and get feedback from the industry. We will have one-on-one and small group sessions - whatever it might take."


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