WASHINGTON -- Rep. Thomas E. Petri, R-Wis., introduced legislation last week that supporters say would bring market discipline to the deposit insurance system.

The "cross-guarantee" concept would require banks and thrifts to seek guarantees from syndicates of banks, thrifts, and private-sector institutions on all deposits and most other liabilities. Since those institutions are themselves guaranteed by syndicates 6f financial institutions, the insurance amounts to a cross-guarantee.

Risk-Based System

The premiums paid for the guarantees would be negotiated and are expected to reflect a market judgment of the risks involved in a particular institution. At the same time, a small backup insurance fund would be maintained to ensure public confidence in the system.

"The cross-guarantee bill sets up an environment for market-driven regulation that doesn't endanger the taxpayer," said Bert Ely, an Alexandria, Va.-based analyst who developed the concept.

Under the current system, Mr. Ely said, some types of risks aren't adequately addressed because the system is overseen by a regulatory agency that effectively constitutes a monopoly.

"That's the issue today with derivative products," he said. "There's a lot of handwringing being done, but what can a monopoly do? Nothing."

On the other hand, he said, private-sector institutions are perfectly equipped to make judgments about unusual or difficult types of risks.

"If you have a risk you want to insure, you go to company A, and if they won't insure it you to company B. And if nobody will insure it, there's probably a good reason not to insure it."

Mr. Ely was one of the first analysts to warn of the losses in the thrift industry's deposit insurance fund, and more recently was one of the first to conclude that the Bank Insurance Fund was rapidly returning to health.

Inspired by Thrift Crisis

The cross-guarantee idea grew out of his work on the thrift insurance fund, which collapsed in 1989. sticking taxpayers with a bill in excess of $100 billion.

Mr. Ely said a number of safeguards were built into the cross-guarantee bill to prevent another taxpayer ballout.

A mandatory "stop loss" mechanism passes part of any large loss to the guarantor's insurer. A minimum number of guarantors will be required for any one bank or thrift to ensure that no one insurer is too heavily exposed to any institution.

In addition, guarantee contracts cannot be canceled unless there is a replacement contract.

A new agency, the Cross-Guarantee Regulation Corp., would make sure the guarantors have sufficient capital to meet their obligations. Weaker institutions would be given time to build enough capital to qualify for a guarantee, and small banks and thrifts would get up to 10 years to obtain a cross-guarantee contract.

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