WASHINGTON - The Federal Deposit Insurance Corp., in releasing its much-anticipated critique of potential reforms Wednesday, unexpectedly addressed the thorny question of how to handle troubled banks deemed "too big to fail."

The agency suggested three alternatives for covering the cost of bailing out a large bank deemed central to the economy.

Though regulators often play down the issue, FDIC Chairman Donna Tanoue said it should be explicitly dealt with when the deposit insurance system is reformed. "It is an important issue, and it should be addressed," she said. "We believe this is the appropriate framework to handle it."

Currently, if the Treasury secretary and the President determine a bank's failure constitutes a "systemic risk" to the economy, other banks would be forced to foot the bill for a bailout through a special assessment. But the FDIC questioned whether that solution is fair now that large bank and nonbank financial institutions are increasingly similar and just as likely to be rescued by the government in the event of a failure.

"If the bank fails, it gets handled within the deposit insurance system, and is funded by other banks," said Art Murton, the agency's director of insurance. "If the institution without a bank charter fails, that failure gets picked up in some other way. The question is, 'Is that appropriate?' The way some people would put it is, 'Is systemic risk really a deposit insurance issue?' "

The FDIC also suggested trimming bailout costs by forcing uninsured depositors to take larger losses.

Though the third option does not go into much detail, the agency suggested refining how the costs of a "systemic risk" assessment are calculated and shared.

One analyst said he was impressed that the agency tackled the issue at all.

"We've never seen this admitted in print before," said Bert Ely, an independent analyst in Alexandria, Va. "Senior officials have traditionally not wanted to acknowledge that 'too big to fail' even exists. But they have only put their little toe into the water on this issue. There needs to be a concise and candid discussion of this."

The FDIC's recognition of "too big to fail" came as part of its broad attempt to reform the system while the economy is strong, banks are profitable, and the agency's reserves are high. The plan, or "options paper" as the FDIC called it, covers three main areas: the nature of the insurance funds, the pricing of deposit insurance, and the level of coverage per account.

In what Ms. Tanoue called "everybody's favorite issue," the agency asked whether the level of insurance coverage should be tied to an index, such as inflation or average per capita income.

It asked for comments on which index should be used, what base should be used, and how often adjustments should occur.

In an example, the FDIC said current coverage if adjusted for inflation since 1980 - the last time coverage was increased - would be $198,000. Adjusted from the same year for average per capita income, coverage per account would be $263,231. However, if adjusted for inflation since 1934, when deposit insurance was created, coverage would be only $61,000. For the same period, coverage adjusted for per capita income would be $279,915.

Ms. Tanoue first raised the prospect of reform and the idea of doubling coverage to $200,000 in a speech last March. Though popular with community bankers, the idea has drawn sharp criticism from Senate Banking Committee Chairman Phil Gramm, Treasury Secretary Lawrence H. Summers, and Federal Reserve Board Chairman Alan Greenspan. At a Senate hearing in June, Mr. Summers and Mr. Greenspan argued that the last increase in coverage was partly responsible for the savings and loan crisis of the 1980s.

Ms. Tanoue responded to her critics at a press conference Wednesday, saying that she respected the opinions of all three men but that the issue should not be separated from comprehensive reform. "This issue can't be viewed in isolation," she said.

Indeed, community bankers have pledged to fight any change in deposit insurance unless an increase in coverage is included.

The agency also suggested limiting coverage to $100,000 per person per institution. (If the coverage limit were changed, the dollar figure would change.) Currently, a person can get much more than $100,000 of deposit insurance through joint accounts and accounts at different banks.

Less controversial but still contentious are proposed changes in the nature of the insurance funds.

Currently, banks are only forced to pay premiums when the ratio of reserves to insured deposits dips below 1.25%. By law, however, the agency is required to charge 23 cents for each $100 of domestic deposits to all banks if the funds fall below that minimum for more than a year. Ms. Tanoue said such a premium "would drain almost $9 billion from insured banks and thrifts - and could lead to a $65 billion contraction in lending."

Instead of the current system with its fixed ratio, the agency suggested a "user fee" system in which all banks would pay a small, steady premium. In the options paper, the FDIC uses an example of an 8.3 cent premium for every $100 of domestic deposits.

The agency also suggested a "mutual" fund system in which banks would own a stake in the insurance funds and contribute based on the amount of their insured deposits. Under such a system, Mr. Murton said, banks could count the fund as an asset the way credit unions do. If a bank's deposits went up during the year, it would pay more into the fund. If the bank's deposits declined, it might receive credit back from the FDIC.

Also on the table is a new system of pricing deposit insurance based on risk. The FDIC's current system judges more than 92% of banks and thrifts as safe - and they pay nothing for deposit insurance. Ms. Tanoue said this system is flawed. "Pricing of deposit insurance has evolved into a penalty system for the few rather than a priced service for all," according to the agency's options paper.

Ms. Tanoue argued that significant differences exist among institutions getting deposit insurance for free. "It isn't fair to the banker who presents a lower risk to the fund to pay the same as a bank that presents a higher risk," she said.

The agency also offered an "expected loss" pricing system, depending on three indicators - the probability of a bank's default, the amount of insured deposits, and the size of the loss to the FDIC. Finally, the agency said market information such as subordinated debt prices could be used to help determine an institution's insurance premiums.

Ms. Tanoue said the agency plans to complete its recommendations in time for the next Congress, which convenes in January.

Rep. Marge Roukema, R-N.J., chairman of House Banking's financial institutions subcommittee, said she will wait for the recommendations before scheduling hearings.


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