WASHINGTON — With reserves at the Federal Deposit Insurance Corp. at their lowest level in more than 16 years, it may seem odd that the agency is concerned about what would happen if it had too much money.

But a top FDIC official asked lawmakers Thursday to re-examine a law that effectively caps the Deposit Insurance Fund by forcing the agency to rebate any extra funds to banks and thrifts.

Arthur Murton, the agency's director of insurance and research, said at a Senate Banking Committee subcommittee hearing that limiting the fund's size in good times is a mistake.

"These restrictions on the size of the DIF will limit the ability of the FDIC to rebuild the fund in the future to levels that can offset the pro-cyclical impact of assessment increases during times of economic stress," Murton said in prepared testimony. "Limits on the size of the DIF of this nature will inevitably mean that the FDIC will have to charge higher premiums against the industry when conditions in the economy are causing significant numbers of bank failures."

Under deposit insurance reform legislation passed in 2006, the FDIC must rebate half the premiums it charges when the ratio of reserves to insured deposits exceeds 1.35%. All the premiums that push the ratio beyond 1.5% must be rebated. (In the fourth quarter the ratio was just 0.4%.)

"Congress may want to consider the impact of the mandatory rebate requirement or the possibility of providing for greater flexibility to permit the DIF to grow to levels in good times that will establish a sufficient cushion," Murton said.

Industry representatives acknowledged that it may be appropriate to address the issue — but not today.

"At some later point, it could be appropriate for Congress to re-examine these provisions," said Steve Verdier, the director of congressional relations for the Independent Community Bankers of America.

The hearing was scheduled to address several issues related to deposit insurance, primarily how the agency will fund its reserves now that it is handling a wave of failures.

A Senate bill authored by Banking Committee Chairman Christopher Dodd would raise the limit on the FDIC's authority to borrow from the Treasury Department to $100 billion. (The limit is currently $30 billion.) The bill also would temporarily enable the FDIC to borrow as much as $500 billion in consultation with the administration and other regulators.

Bankers strongly support the measure, because it would allow the FDIC to cut a proposed special assessment in half, to 10 basis points.

"The FDIC must maintain a balance between recapitalizing the DIF and ensuring assessments charged to banks for deposit insurance do not reach counterproductive levels that would divert capital needed for lending to promote economic recovery in our communities," said William Grant, the chairman and chief executive of First United Bank and Trust in Oakland, Md., who testified on behalf of the American Bankers Association. "Expanding the flexibility to access working capital" from the Treasury would mean "the FDIC has less immediate need for cash from the industry as a buffer against unexpected losses."

Lawmakers also said the bill is a top priority.

"I am sensitive to concerns that without increased borrowing authority, assessments could force financial institutions to raise consumer fees and curtail lending," said Sen. Tim Johnson of South Dakota, the panel's No. 2 Democrat, who chaired the hearing.

However, "I believe that any money borrowed from the Treasury must be repaid, with interest, and that all actions must be temporary with an eye to the long-term restoration of the insurance funds," Johnson said.

It remains unclear if the legislation will be attached to a broader bill that would let judges reduce mortgage debt in the bankruptcy process — legislation the financial industry strongly opposes.

Sen. Mike Crapo, R-Idaho, who cosponsored the Senate bill, objected to including the two issues together. He said addressing the FDIC's funding needs was urgent enough to pass the FDIC bill alone.

"I strongly oppose including the cramdown legislation with this legislation," Crapo said.

The mortgage bankruptcy bill the House passed March 5 included provisions that would raise the FDIC's borrowing authority to $100 billion, permanently increase deposit coverage to $250,000 per account and authorize the FDIC to charge holding companies, as well as banks, for a special premium needed to recoup losses from a systemic risk determination.

Murton expressed support for the proposed flexibility in assessing the systemic risk fees.

"The FDIC's recent experience suggests that the current statutory provisions regarding a systemic risk special assessment may not provide sufficient flexibility to appropriately allocate any special assessment among the parties who benefit from government action," he said.

He also asked lawmakers for additional time to rebuild the fund. Under current law, the agency has five years to restore the reserve ratio to 1.15%. "Extending the statutory five-year time period for restoring the DIF reserve ratio … would be appropriate," he said.

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