SEATTLE - A top regulator warned Monday that the slowing economy has made the need for deposit insurance reform more urgent.

Stock market jitters and sharp increases in consumer debt, home prices, the supply of commercial real estate, as well as a risk of corporate loan defaults, could signal tougher economic times ahead and more bank failures, Federal Deposit Insurance Corp. Chairman Donna Tanoue said in a speech to the annual convention of America's Community Bankers here.

If more banks failed, most banks and thrifts could suddenly be forced to pay steep deposit insurance premiums after having paid none since the mid-1990s, and that would tighten credit, Ms. Tanoue said. Using stronger language than in past speeches, she said the system's flaws should be fixed before a premium increase becomes necessary.

"The industry pays most when it can afford it the least, thus hindering the industry's ability to fuel a recovery by granting credit," Ms. Tanoue said. "Shouldn't we do what we can to address the latent flaws in our current system? There are signs that our window of opportunity … may be closing."

Nearly 93% of banks and thrifts pay no premiums because they are well capitalized and managed, but they would face a levy if a spate of failures drove the ratio of insurance-fund reserves to insured deposits below the legal minimum of 1.25%. Unless the bank and thrift funds are merged soon, Ms. Tanoue said, thrifts could be particularly vulnerable because their fund is much smaller.

A midsize thrift's failure could wipe out the $1.5 billion now in the thrift-fund reserve and force the remaining institutions to pay 23 cents for every $100 of insured deposits, Ms. Tanoue said.

"The reserve ratio could drop well below the 1.25 legal level in a relatively short period," Ms. Tanoue said. "The more severe the scenario, the higher the premiums."

She predicted that, if a similar drop occurred in the bank fund, nearly $9 billion of earnings would have to go to insurance premiums and a $65 billion reduction in lending would result.

"This contraction would likely come at the worst possible time - during an economic downturn," Ms. Tanoue said.

She elaborated on her previous critiques that the current system is unfair to older and less risky institutions, because most new and fast-growing institutions have not had to pay any premiums.

"The current system allows fast-growing institutions to increase their insured deposits without paying assessments into the insurance fund," Ms. Tanoue said. "That is patently unfair to the vast majority of institutions that paid into the fund to capitalize it."

For example, a $500 million-asset thrift that doubled its size through steady growth during the last 15 years, to $1 billion, would have paid $20 million in premiums along the way, she said. By contrast, an institution whose insured deposits grew to $3.1 billion from $250 million four years ago - when insurance premiums were reduced - would have had to pay only $2 million for deposit insurance.

She also sought to play down fears that a reform package would force institutions to pay higher fees and cost more in the long run.

"A better system means that the industry will pay less, and whatever it does pay, safer banks will pay a smaller share," Ms. Tanoue said. Industry reaction to the speech was generally positive.

"The economic climate is much more uncertain today than it was a couple years ago, said James Chessen, chief economist for the American Bankers Association. It gives everyone the idea that it is better to reform now while things are still going well."

Others said that, though reform could draw new deposits, many unanswered questions remain about its costs.

"We need to weigh it and ask at what price do we bring those new deposits in if they come," said Diane Casey, president of the ACB. "Are there going to be new regulatory burdens that will be imposed? Because with deposit insurance there often comes increased regulatory oversight."

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