Merger mania during the 1990s has made the Bank Insurance Fund far more likely to run out of money in coming years, a Federal Deposit Insurance Corp. study has concluded.

The report, released Tuesday to the House and Senate Banking committees, compares the level of industry consolidation at yearend 1990 to that at mid-1999. It then estimates the likelihood that the bank insurance fund would become insolvent at some point during the next 50 years.

According to the study, the insurance fund is now two-thirds more likely to fail than it was at 1990 consolidation levels.

"The little (bank failures) are never going to break you," said Roger Watson, FDIC research director. "It's the low-probability, large-institution failures" that pose the greatest risks to the insurance fund and the taxpayer.

The findings dovetail with a long-held FDIC policy goal: the merger of the bank and thrift insurance funds. Indeed, a companion study released Tuesday by the FDIC argues that a merger would reduce the chances of either fund's becoming insolvent.

Neither of the financial reform bills passed by Senate and House lawmakers call for merging the bank and thrift insurance funds.

Industry observers said the compromise that Congress members are working on is unlikely to be any different. But Karen Shaw Petrou, the president of ISD/Shaw, said the FDIC has reason to be hopeful.

"I think there is a lot of interest in making deposit insurance reform the next big bill," she said. "I've talked to several senior members of the banking committees and top staff who see the Achilles heel of the current bill is that it does not really deal with the 'What if things go wrong?' question."

Ms. Petrou said the recent failures of First National Bank of Keystone in West Virginia and BestBank of Boulder, Colo., make the case for insurance reform appear that much more urgent. Both banks were felled in part by excessive subprime lending.

The FDIC's study, "Effects of Bank Consolidation on the Bank Insurance Fund," illustrates the record asset concentration of the 1990s.

According to the agency, 31.8% of industry assets at yearend 1990 were held by the 25 largest bank holding companies. By mid-1999, their share had grown to 54.5%.

The impact of 1990s consolidation has not been entirely negative, Mr. Watson said.

For example, loss rates on big bank failures tend to be lower than for small banks because of economies of scale and risk diversification. Large banks are less dependent on domestic deposits for funding, so they have fewer insured deposits per asset dollar.

The biggest banks are also far less likely to fail than small banks, Mr. Watson said. But given that large banks now control a huge portion of all industry deposits, the failure of just one could prove highly damaging.

If one of the 10 biggest banks failed, he said, there is a 12.5% chance that the bank insurance fund would become insolvent, according to the FDIC study.

The net impact of size on the insurance fund's solvency is reflected in the FDIC study's figures. At the present level of consolidation, there is a 6.5% chance that the bank insurance fund will become insolvent sometime before 2050. By contrast, at 1990 consolidation levels, the likelihood was 3.9%.

The study assumes future failure and loss rates will be similar to past trends. According to Mr. Watson, structural changes in the industry make that assumption suspect.

For example, he said, the expansion of interstate banking has led to greater geographic diversification, and banks today have more sophisticated tools for managing risk.

The 1990s also have seen significant legislative reforms, including the introduction of prompt corrective action procedures, the least-cost test for resolving failed institutions, and the depositor preference law, which established a pecking order for bank depositors and creditors.

FDIC researchers are in the preliminary stages of designing a related study. In it, they will explore the impact of the "systemic risk" option. Under that option, regulators and the President can choose to prop up a failing bank if its failure poses a significant risk to the stability of the financial system.

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