WASHINGTON — Policymakers are pushing the first general deposit insurance increase in nearly 30 years as part of the bill to stabilize the financial markets.
Both major presidential candidates backed raising the limit to $250,000 per depositor Tuesday, saying it would help soothe the fears of both depositors and small businesses.
One option would be to give the Federal Deposit Insurance Corp. temporary emergency power to increase coverage. That idea, which the agency said it supports, gained traction Tuesday as lawmakers sought to attract more support for the legislation, which failed a critical House vote Monday.
"To address this crisis of confidence, I do believe that it would be helpful for the FDIC to have the temporary ability to raise deposit insurance limits," FDIC Chairman Sheila Bair said in an e-mail. "This would provide the dual benefits of providing additional liquidity to banks for lending as well as provide some additional reassurance to depositors above the current limits."
Ms. Bair said her agency would potentially have to borrow from the Treasury to support higher coverage, but that would "need to be paid back through the FDIC's primary funding source — industry assessments."
Even though banks and thrifts would face higher costs, industry representatives supported the idea, arguing that it could help curb runs and ease other consumer concerns.
"If they raised the deposit insurance limit, it would add more stability to the banking system," said Dale Gibbons, the chief financial officer of the $5.2 billion-asset Western Alliance Bancorp. in Las Vegas. "Frankly, it is something that would be inexpensive to accomplish that would strengthen the structure."
Though the idea has been controversial in the past, Sens. Barack Obama and John McCain came out early Tuesday in support of raising the limit to $250,000.
Standard FDIC coverage is "insufficient for many small businesses to meet their payroll or buy their supplies and create new jobs," Sen. Obama said at a campaign rally in Nevada. "The current insurance limit of $100,000 was set 28 years ago. It has not been adjusted for inflation."
Sen. McCain said in a pair of cable television interviews that he supports an increase.
"I have talked to the president this morning and recommended an increase from $100,000 to $250,000 FDIC insurance on deposits," he said on Fox News.
The candidates' comments dovetailed with what lawmakers were already trying to do to salvage the bailout bill, which would create a facility to buy and hold up to $700 billion of troubled assets. During the contentious vote Monday, several lawmakers who opposed the bill raised the prospect of increasing deposit insurance instead.
To secure their support, House and Senate leaders began contemplating a way to add such a provision to the bill. One provision under consideration Tuesday would allow the FDIC to back any deposit temporarily in the event of a bank failure — provided it consulted first with the Treasury Department and the Federal Reserve Board.
Both the Treasury and the Fed have adamantly opposed a coverage hike in the past, and sources said they did not initially support adding a coverage increase to the bailout bill. Ultimately, however, both appeared willing to agree to the provision if it secured the bill's passage.
How long the added coverage would last is unclear. The provision is likely to give the FDIC the power to raise the limit for the rest of the housing crisis.
The provision is proof of how fast events are changing. Just a few years ago, raising the coverage limit was a political nonstarter, but it received a boost last week when House Financial Services Committee Chairman Barney Frank expressed interest in raising the limit next year. By this week, as lawmakers scrambled to find provisions that would gain more support, next year appeared too far away.
Industry representatives said a coverage increase made sense.
"Under the current market circumstances, we are working for and would support some type of temporary increase in deposit insurance coverage," said Edward Yingling, the president of the American Bankers Association. "We would expect to pay" for the increase, but "we don't think it would increase the cost too much" on banks.
Karen Thomas, the director of government relations for the Independent Community Bankers of America, which initially pushed a coverage hike eight years ago, said raising the limit would stem panic, though bankers would demand details on the cost.
"They are fielding lots of questions from nervous customers," she said. "An increase in coverage would help to allay those fears, but we would need to have some questions answered about when and how and if it would be funded in order to know the complete picture."
At issue is how a coverage increase would affect the Deposit Insurance Fund. Covering uninsured deposits in a failure usually increases the cost of a collapse. The lower the fund goes, the more banks must pay in premiums to make up the shortfall.
Additionally, insuring more deposits would automatically lower the ratio of federal reserves to insured deposits, the benchmark the FDIC uses to gauge the fund's health. At the end of the second quarter the ratio was 1.01%, or 14 basis points below its statutory minimum, and the FDIC is expected to set new assessment rates this month.
The impact of a coverage hike may not be as strong as bankers fear.
L. William Seidman, who led the FDIC during the savings and loan crisis, cited studies it conducted during his tenure showing that an increase would not cost much.
"I have for years said that it should be raised. … I certainly think it would be a good idea in these times," he said. "We did some studies that showed that the cost to the fund was very little extra."
Former Fed Vice Chairman Alan Blinder said support among bankers may vary by bank size, especially if premiums rise as a result for small banks with few uninsured deposits.
"For some banks, this is going to be very damaging when they don't really need another knock on the head," said Mr. Blinder, now a professor at Princeton University. "If you're running a bank that has very few uninsured deposits, this is not going to be good for you, because it's going to lead to a substantial increase in your premiums and not help your business very much. On the other hand, if you're a bank that is loaded with uninsured deposits, like a big money-center, this is going to be very good for you."
Community bankers began pushing for an increase in the limit eight years ago as part of a bill to reform the deposit insurance system. The bill that passed in 2006 allowed the FDIC to begin indexing the limit to inflation in 2011 and raised the limit for retirement accounts to $250,000.
The agency has been cautious in expressing views on the subject, but it has shown signs in the past that it would support a more explicit increase. In a 2000 speech, then-FDIC Chairman Donna Tanoue indicated that a $200,000 limit was a good idea — a position she later retracted.
"We are inclined to think that raising the coverage limit to $200,000 may not substantially elevate the risk exposure" of insurance reserves, she said.
The proposed increase was squashed after opposition from top policymakers at the time: Fed Chairman Alan Greenspan, Treasury Secretary Larry Summers, and Senate Banking Committee Chairman Phil Gramm. Ironically, two of the policymakers now advise the presidential candidates, with Mr. Gramm giving advice to Sen. McCain and Mr. Summers advising the Obama campaign.
