WASHINGTON - When Federal Reserve Board Chairman Alan Greenspan says he hates your idea, it is time to come up with a plan B - or several of them.
That is what the Federal Deposit Insurance Corp. quietly has done by tucking inside its reform plan some creative alternatives to doubling coverage to $200,000 per account. These new wrinkles include selling banks additional federal coverage or relying, at least in part, on private insurers.
Industry representatives said that these alternatives, though intriguing, may be too complicated and that they will stick to their original position.
"Clearly, we prefer a straight raise in the coverage limit," said Karen Thomas, director of regulatory affairs for the Independent Community Bankers of America. "We have a lot of questions as to how these other options would work in practice."
The FDIC, however, had to do something after top policymakers responded harshly to initial hints the agency wanted to increase coverage for the first time in two decades.
When Chairman Donna Tanoue broached the idea in March, Senate Banking Committee Chairman Phil Gramm immediately opposed it and said the present coverage is already too high. The idea seemed dead for sure when Mr. Greenspan and Treasury Secretary Lawrence H. Summers opposed an increase at a Senate hearing in July, testifying that it would contradict efforts to encourage market discipline and could invite another debacle like the thrift crisis.
Though reluctant to discuss further details, agency officials included in their 84-page "options paper" issued last month three alternatives that would let some banks offer excess insurance.
Under one alternative, the FDIC would, in essence, sell insurance to banks that wanted it. Financial institutions would pay an extra premium for the added coverage, and possibly pass that cost on to account holders.
What remains to be seen, however, is how the higher premium would be determined, or exactly how much extra coverage could be offered.
Under a second option, the FDIC would provide - for a fee - a government guarantee for private excess insurance. Though several companies already offer private insurance, none have the backing of the federal government.
An advantage of that alternative is that it would retain a role for the market in setting premiums. Not yet determined is whether the FDIC would have the right to refuse insurance to some companies or institutions, and how many agency resources would be required for oversight.
A third alternative would borrow from the original deposit insurance law, which authorized so-called coinsurance. That 1933 statute gave full protection for the first $10,000 in each account, 75% coverage up to $50,000, and 50% protection after that.
Under the new coinsurance proposal, the agency could offer something similar, updated for higher amounts.An advantage of this alternative would be to foster depositor discipline, because customers would still have some money at stake, while increasing the amount of coverage. The FDIC said there are 16 countries with a coinsurance system, including the United Kingdom, Germany, and Ireland.
Early critics called these proposals too complicated.
Diane Casey, president of America's Community Bankers, said that having some banks offer higher coverage while others do not could confuse consumers. "It is really important to keep this simple so the depositor knows what they are getting," she said. "If it takes 20 minutes to explain how it works, we have already lost."
But at least one official thought the idea of coinsurance was something to take seriously.
"The whole notion is that it would expose someone to a very small loss, enough to make them pay attention to where they put their money," said Jim Chessen, chief economist at the American Bankers Association. "It is a good concept, but is it better than just raising the limit to $200,000? I don't know, but it is worth considering."
Other experts said the idea of depositor discipline was meaningless because the government would rescue "too big to fail" banks if their collapse would significantly harm the economy.
"These options aren't viable because depositors are convinced that the FDIC would protect them fully," said Karen Shaw Petrou, president of the ISD/Shaw consulting firm in Washington. "They would have to be persuaded there is a real risk."
