WASHINGTON - Contrary to common understanding, the government has no plans to build the Bank Insurance Fund above its targeted level of $1.25 in reserves for every $100 of deposits insured.

Rather, the Federal Deposit Insurance Corp. is proposing to adjust premium rates swiftly in order to maintain the bank fund at 1.25%.

This is welcome news to bankers who have been concerned that the FDIC wants to build a "cushion" above the congressionally mandated 1.25% reserve target. The industry also has complained about the agency's proposal to adjust bank rates twice a year without seeking public comment. Under the FDIC's proposal, rates could never be raised more than 5 cents a year - not a total of 10 cents as American Banker reported on April 28.

In an interview to set the record straight, Lisa Stanley, senior counsel at the FDIC, said this link between the rate adjustment mechanism and maintaining the fund at 1.25% has been missed.

"There's been some confusion," Ms. Stanley noted. "We propose to use the rate adjustment to maintain the 1.25% target."

Some of the confusion was created by a table included in the FDIC's proposal to reduce bank premium rates, she said. That table shows the bank fund remaining above 1.25% until 2002. But, Ms. Stanley pointed out, the table assumes bank premiums remain constant at 4.5 cents.

However, the agency plans to fine-tune rates by up to 5 cents a year to keep the fund near the 1.25% ratio, she explained.

"The amount of the increase or the shift could never be more than 5 cents," she stressed.

Congress in 1991 told the FDIC it could not lower deposit insurance premiums until the bank or thrift fund reached the 1.25% reserve ratio.

Knowing the bank fund was closing in on the target, the FDIC in January laid out its plans for reducing bank premiums to an average of 4.5 cents per $100 of domestic deposits.

That 52-page proposal complete with four tables makes clear that the FDIC all along intended to keep the fund at 1.25% by adjusting rates up to twice a year.

"The proposed rate would be adjusted semiannually up or down by the adjustment factor of up to 5 basis points as necessary to maintain the target designated reserve ratio at 1.25%," the FDIC proposal reads.

However, to avoid huge shifts in rates, the FDIC noted that no bank paying, say a 4-cent premium, would be hit with anything above 9 cents without a chance to weigh in through the agency's notice and comment procedure.

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