WASHINGTON - Dealing a blow to small banks lobbying for deposit insurance reform, Federal Reserve Board Chairman Alan Greenspan and Treasury Secretary Lawrence H. Summers on Wednesday came out against raising coverage to $200,000 per account.
In unusually blunt remarks, both agreed that doubling current coverage would heighten risks to the deposit insurance funds, reduce incentives for investors and depositors to scrutinize the financial conditions of banks, and primarily benefit the wealthy.
"Such an increase would be ill-advised and would represent a serious public policy error that could increase systemic risk by eroding market discipline," Mr. Summers said in response to a question by Senate Banking Committee Chairman Phil Gramm at a hearing on unrelated legislation. "It is not, in our judgment, necessary in order to protect small savers."
While acknowledging that inflation has whittled the value of insurance coverage since it was boosted to $100,000 from $40,000 two decades ago, Mr. Greenspan said most economists consider the 1980 hike "a bad mistake." Another increase would be counter to the high-tech, free-market direction of global financial markets, he said.
"It is very important that our market processes are sound and that they are not distorted inordinately by a subsidized structure," Mr. Greenspan said, also in response to Sen. Gramm. "We want to be certain that the market safeguards of that system are not undercut. Doubling deposit insurance, which essentially would be giving increased subsidies to upper income individuals almost by definition, is in my judgment a mistake."
These comments were music to the ears of Sen. Gramm, who had immediately opposed raising deposit insurance levels when FDIC Chairman Donna Tanoue first broached the idea in March. He reiterated a commonly held view that the last deposit insurance increase contributed to the savings and loan crisis.
"It represents to me a shifting of risk from the investor to the government and ultimately to the taxpayer," the Texas Republican said.
Kenneth A. Guenther, executive vice president of the Independent Community Bankers of America, blasted both regulators and said that community banks need higher insurance levels to attract more deposits to fund loans. Moderate-income Americans commonly have more than $100,000 in savings, he argued.
"Secretary Summers has spent more time in Asia than mainstream America," Mr. Guenther said. "His is a typical free-market view of someone who has not looked at this issue carefully."
He added: "We hope that the effect of Chairman Greenspan's remarks does not further push core deposits out of the banking system into the stock markets. This would further aggravate his and our problem."
Mr. Greenspan said he sympathized with community banks but that another solution must be found. "Creating weakness in our underlying financial structure for the purpose of resolving a real problem, but a different type of problem, in my judgment would be a major policy mistake."
An FDIC spokesman said Ms. Tanoue was flying to a meeting in Phoenix and could not be reached to comment. He downplayed any suggestion that agency heads are at war on the matter, noting that the FDIC is still developing a broad deposit insurance reform plan and has not formally proposed raising coverage.
Sen. Tim Johnson, D-S.D., Rep. Joel Hefley, R-Colo., and others have introduced bipartisan bills in the past month that would raise coverage to $200,000. Rep. Marge Roukema, chairman of the House Banking subcommittee on financial institutions, was believed to support raising deposit insurance, but said in an interview Wednesday that she will not make up her mind until after holding hearings beginning in September. "We shouldn't jump to any conclusions."