WASHINGTON - Community banks that depend too much on alternative sources of funding such as Federal Home Loan Bank System advances need an increase in the deposit insurance coverage limit, the Independent Community Bankers of America says.
A report from the trade group says smaller banks are facing a funding crisis and are forced to turn to alternatives because the current ceiling of $100,000 is not high enough to attract new depositors.
Kenneth Guenther, the group's executive vice president, pointed to a recent article by three Federal Reserve Bank of St. Louis economists in which they argued that increasing dependence on Home Loan bank advances is a threat to the safety and soundness of community banks and to the deposit insurance funds. "If we don't get a coverage increase, it will drive banks to get more Federal Home Loan bank advances," Mr. Guenther said. "This is raising a lot of concern at the Fed. Raising coverage is a safe and sound solution for the problem."
The ICBA also argued that a bill introduced by Rep. Richard Baker, R-La., raises questions about the extent to which community banks can rely on government-sponsored enterprises such as Fannie Mae and Freddie Mac for more funding.
"While community banks now have more alternative funding sources, these sources cannot be relied on as a complete replacement for deposits," the paper says. "Community bankers recognize this, and their examiners caution against too great a reliance on nontraditional funding sources."
The ICBA's report urges Congress to adjust deposit insurance to reflect inflation since 1980, which would effectively double the maximum. The full 31-page report is available at www.icba.org.
The Federal Deposit Insurance Corp. has been working since March on plans to reform the system and is expected to make recommendations to Congress in early 2001.
