fund up to a 1.25% reserve ratio. You might think, with all that money at stake, that 1.25% would be a meaningful figure, arrived at using the best actuarial and mathematical skill the nation has to offer. Nope. "Why is it 1.25?" asked Roger Watson, the FDIC's director of research and statistics. "Why not?" Said Bert Ely, the Alexandria, Va., banking consultant and deposit insurance guru: "It is, in fact, a totally arbitrary figure." For the first 46 years of its existence, the FDIC did not have any sort of reserve requirement. Its premiums were set by Congress in 1933 in roughly the same way that property insurance companies set their premiums. That is, the monetary losses from bank failures for a number of years prior to 1933 were averaged, and premiums were set to cover an average year's losses. That came out to 12.5 cents for every $100 of domestic deposits, Mr. Watson said. Bankers complained this was too high, so the average was recalculated excluding years of catastrophic bank runs, and a premium of 8.3 basis points was chosen. Banks kept paying that amount every year, and reserves in the fund topped $1 billion in 1946. It was generally felt that this was a preposterously huge amount of money, so in 1950 Congress passed legislation allowing the FDIC to rebate part of banks' 8.3 basis points in years when premium income outweighed losses from bank failures - which turned out to be every year until 1984. Reserve ratios first found their way into law in 1980, when Congress changed the premium formula for the first time in 30 years. The size of banks' rebate was to be adjusted depending on where the fund's reserves fell among three ratios: 1.10%, 1.25%, and 1.40%. As best anyone can tell, these figures were arrived at by averaging the reserve ratios of previous years. In the 15 years prior to 1980, in fact, the average reserve ratio was almost exactly 1.25%. In 1989, with the FDIC reeling from big losses and the Federal Savings and Loan Insurance Corp. underwater, Congress set 1.25% as a goal and gave the FDIC authority to set premiums as high as needed to get its Bank Insurance Fund and the newly created Savings Association Insurance Fund up to that level. Now that the bank fund has passed that threshhold, House and Senate Banking committee conferees have agreed to order FDIC to stop collecting premiums from most banks whenever the ratio is at 1.25% or higher. "Today it's treated like some magical thing that shouldn't be breached," said Jake Lewis, a longtime member of the House Banking Committee staff who now works with Ralph Nader's Center for Study of Responsive Law. Mr. Lewis argues that, in light of the FDIC's recent loss experience and the added risk to the insurance funds posed by megabanks created in the current merger wave, the reserve ratio ought to be higher than 1.25%. Mr. Ely, on the other hand, thinks the reserve ratio simply doesn't matter. His reasoning: Normal insurance fund losses can be paid out of banks' premiums each year, while no reserve ratio will ever be high enough to cover catastrophic losses such as those incurred by the 1980s savings and loan meltdown Mr. Watson said the FDIC is starting work on an extensive study of just what the reserve ratio should be. But he doubts the agency will be able to come up with a definitive answer. The difficulty in coming up with the right ratio, said Edward J. Kane, a Boston College finance professor and author of two books on the FSLIC crisis, is that laws, regulations, and the behavior of banking regulators play such a big role in determining deposit insurance losses. "You could get by with virtually no reserves if you had perfect supervision," he said.

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