A former Federal Deposit Insurance Corp. chairman warned community bankers Monday that calls to double deposit insurance coverage are misguided and would spell disaster for the system.
I believe increasing deposit insurance to $200,000 that is, doubling the current $100,000 level risks efforts to privatize the deposit insurance fund, and thats too great a risk to take, said Ricki Helfer, who is currently a consultant for Americas Community Bankers.
In the past large banks have complained about the costs associated with deposit insurance coverage and have suggested that the system be privatized. The increased costs associated with higher coverage could give banks an incentive to try to leave the system and buy private insurance, Ms. Helfer said.
A private insurance system would be less robust and more likely to require government assistance, she said. Privatization will be a fatally flawed system in the event of a significant banking crisis, and the taxpayer will ultimately have to pick up the tab.
A better method of increasing coverage would be to index the funds to inflation, Ms. Helfer said. She recommended placing coverage in the range of $100,000 to $140,000 where it would currently stand if indexing had begun with $40,000 of coverage in 1974 and allowing the FDIC to raise the levels as necessary.
By contrast, if indexing were based on 1980 levels, when the coverage was raised to $100,000, the current level would have to be raised to $198,000, Ms. Helfer said. However, $100,000 was too much coverage in 1980 and would be the wrong figure to base an index on, she said.
Ms. Helfers statements represent stronger criticism than those made by ACB officials, who have approached the idea of raising coverage cautiously and argued that the political cost of such a hike could be too high
Federal Reserve Board Chairman Alan Greenspan and other top policymakers have opposed the hike because, they said, it would encourage risky behavior by financial institutions and undercut market discipline.