WASHINGTON - Refuting some skeptics' predictions that deposit insurance reform would capture no interest on Capitol Hill, a House subcommittee hearing Wednesday on the Federal Deposit Insurance Corp.'s proposal sparked a detailed discussion and provided early signs of which way some lawmakers are leaning.

Though members of the House Financial Services subcommittee on financial institutions offered measured comments and questions to FDIC Chairman Donna Tanoue and industry witnesses, many indicated that they support most of the recommendations made by the agency last month.

"It is very encouraging," Ms. Tanoue said after the hearing.

But one of the issues raised repeatedly during the hearing was not among the agency's recommendations - granting unlimited federal coverage for municipal deposits. Several members asked Ms. Tanoue whether the FDIC would endorse such a proposal, and said that they were looking closely at the issue.

"I am particularly interested in hearing from our witnesses on the issue of higher coverage levels for municipal deposits, which have historically been a vital source of funding for community banks but have become increasingly expensive to attract and maintain," said Rep. Spencer Bachus of Alabama, the Republican chairman of the subcommittee.

Ms. Tanoue said she was "cautious" about supporting any proposal to fully guarantee public deposits, and said that the agency was still assessing the consequences of it. (Currently, all deposits are insured up to $100,000 per account.)

Other subcommittee members said they would not support such a provision, however.

"It is not a good idea to give 100% coverage to an individual class of depositor," said Rep. Mel Watt, D-N.C.

Lawmakers also confronted one of the most controversial recommendations - to start charging premiums again for the first time in five years. Currently more than 92% of banks and thrifts pay nothing in premiums because they are in the best risk category. The agency's plan would split the lowest risk group into three separate categories, with the least risky institutions paying a 1 basis point premium, the middle tier 3 basis points, and the third tier 6 basis points. To offset these higher premiums, the FDIC has proposed rebates based on past contributions provided the ratio of federal reserves to insured deposits exceeds 1.35%

Though industry witnesses balked at the FDIC's cost estimates as too high, some lawmakers said that the current system has to be changed because it does not differentiate enough among the riskiest institutions.

"There is no difference between the profile of the most risky institutions and the safer ones," said Rep. Richard Baker, R-La. "There is little incentive in the current regime to operate prudently, safely, and conservatively."

After questions from several lawmakers, industry witnesses admitted that they had no problem with the larger concepts being proposed by the FDIC, but wanted to reduce how much and how many banks would pay.

"We like the FDIC's model, we just don't like the numbers they have put out with the model," said James E. Smith, president-elect of the American Bankers Association and chairman and chief executive officer of Citizens Union State Bank and Trust in Clinton, Mo. "But we will see what we can do with the numbers, and how it would play out."

Subcommittee members also took some swipes at fast-growing institutions, including Merrill Lynch & Co. and Salomon Smith Barney, that add billions of dollars in insured deposits and dilute the reserve ratio without paying anything in premiums.

"I'm surprised this has been going on for so long," said Rep. Maxine Waters of California, the ranking Democrat on the subcommittee. "I'm anxious that we not allow the Merrill Lynchs and Salomon Smith Barneys to continue to do this. I want the community bankers to know that for at least one person on this committee, their testimony on this has struck a strong chord."

Subcommittee members remained split on whether to significantly increase the deposit insurance coverage level per account and index it to inflation.

"Some community banks and a number of members of Congress have called for an examination of the level of deposit insurance coverage. I have not yet been convinced of the wisdom of that, and the burden of proving either the necessity or desirability of such an increase rests on the advocates of an increase," said Rep. John J. LaFalce of New York, the ranking Democrat on the full House Financial Services Committee.

Subscribe Now

Access to authoritative analysis and perspective and our data-driven report series.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.