The days of free deposit insurance may be dwindling for thrifts.

On Jan. 1 the Federal Deposit Insurance Corp. must move roughly 10%, or $1 billion, from the thrift insurance fund to a hard-to-access special reserve account.

FDIC officials, who have tried to block creation of the special reserve, said siphoning money from the Savings Association Insurance Fund could cause a premature and unnecessary hike in insurance premiums.

If the fund falls below the statutory minimum "because of savings association failures or because of faster-than-expected growth in insured funds, the FDIC would be required to raise SAIF premiums," FDIC Chairman Donna A. Tanoue testified this summer before the Senate Banking Committee.

A 1996 law requires the FDIC to withdraw from SAIF all funds in excess of 1.25% of insured deposits on Jan. 1 and then transfer the money into a special reserve account. That amounts to roughly $1 billion of the nearly $10 billion in thrift fund reserves, which currently equal $1.38 for every $100 of insured deposits.

The money set aside could not be tapped unless losses from thrift failures pushed SAIF's reserve ratio below 0.65% of insured deposits for about one year.

If SAIF's reserves fall below 1.25%, the law also requires the FDIC to raise thrift premiums. The fund currently brings in about $500 million a year in interest on investments. In addition, the ratio is affected by deposit growth, operating expenses, and losses on thrift assets.

Arthur J. Murton, who leads the FDIC's insurance division, declined to predict 1999 losses. On Tuesday he is scheduled to brief the FDIC board on losses expected through June 30 in both the thrift and Bank Insurance Fund.

But Mr. Murton said thrift losses would have to total about $300 million in 1999 to push SAIF below the 1.25% minimum and trigger premium payments. He said recent annual losses have been significantly lower. Only one thrift has failed in the past three years, and it had assets of only $35 million.

Bert Ely, an Alexandria, Va.-based bank consultant, said it is unlikely that the economic slowdown and the decline in underwriting standards will cause enough thrift losses in 1999 to drive SAIF below the 1.25% minimum.

Robert R. Davis, head of government relations at America's Community Bankers, agreed. "In the near term, it probably won't have any immediate impact on SAIF-insured institutions," he said. "But it creates a circumstance where if anything happens that leads to a decline in the business of the banking industry, there's a billion-dollar buffer that in essence has been removed."

The FDIC is not just worried about charging unnecessary premiums, but about creating a differential between bank and thrift premiums levels, which now are identical. Ironically, a primary motivation behind the 1996 law that mandated the special reserve was to equalize bank and thrift premiums.

"Differences in deposit insurance assessments among institutions should be based on differences in risk posed to the insurance funds, not upon artificial distinctions," Ms. Tanoue wrote in a Sept. 30 letter to Senate Majority Leader Trent Lott.

The banking industry is almost as eager as the thrifts are to repeal the SAIF special reserve-especially given that commercial banks hold one-third of all SAIF-insured deposits. "I don't think there are many policy arguments against repeal," said one banking industry source.

Though repeal advocates are disappointed that Congress did not act in time to prevent the special reserve's Jan. 1 debut, they vowed to renew their lobbying efforts in 1999.

"It made a lot of sense from a public policy standpoint to do it this year," said the ACB's Mr. Davis. "But certainly it's still an equally valid public policy objective next year."

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.