WASHINGTON -- The Federal Deposit Insurance Corp. proposed a regulation Tuesday to implement a 1991 law that requires it to handle failed institutions at the least cost.

The regulation, whose principles the agency has been following in practice since enactment of the FDIC Improvement Act in 1991, makes clear that the insurer can still engage in purchase-and-assumption transactions that cost less than liquidating an institution and paying off depositors.

Conflict Seen

However, Alexandria, Va.-based analyst Bert Ely said a separate law enacted in August had "sounded the death knell for purchase-and-assumptions."

The depositor preference provisions of the 1993 budget law bar the FDIC from paying off general creditors of a bank until the insurance fund's costs have been fully covered.

Instead of purchase-and-assumption deals, in which all of a bank's assets and liabilities are transferred to a new owner, "there will be deposit transfers," Mr. Ely said. The question is whether the FDIC "will transfer all deposits or only insured deposits," he added.

Protection for Depositors

Karen Shaw, president of the Institute for Strategy Development, a financial services consulting firm in Washington, said the two laws affect uninsured depositors differently.

Under the 1991 law, she said, "uninsured depositors are asked to bear more losses" than before.

However, "the practical effect" of the FDIC Improvement Act combined with depositor preference "is to make it much easier to protect uninsured depositors."

The proposed FDIC rule also incorporates a provision in the 1991 law permitting exceptions to the least-cost test when a bank failure poses risk to the banking system as a whole.

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