Last year the Federal Deposit Insurance Corp. killed a plan to simplify the insurance rules on joint and some trust accounts. But when the agency resurrected the very same proposal last week, the plan was expected to fly, even though it would widen the government's safety net.
What revived it? A hefty reduction in the proposal's estimated price tag-from $22 billion to about $80,000 for the joint account change-and a promise from new agency Chairman Donna A. Tanoue that the plan is an anomaly.
"These actions are not the start of a trend in expanding deposit insurance coverage," she said.
Statistically speaking, the two cost estimates-products of two different studies-are not comparable.
Politically speaking, though, that may not matter.
Back in May 1996, the FDIC-which had evidence that some joint and trust account holders were dangerously overestimating their insurance coverage- floated its proposal for the first time.
Under the plan, the maximum insurance coverage on a joint account would rise from $100,000 total to $100,000 per person. Also, siblings and parents would be added to the list of qualified beneficiaries for revocable trust accounts, which are paid out when the owner dies. Beneficiaries are currently limited to spouses, children, and grandchildren.
Public comment letters sent to the agency were "uniformly favorable," according to a postmortem later published in the Federal Register.
Then the FDIC unearthed a 1992 Federal Reserve Board study which suggested that the joint account change alone could expand federally insured deposits by $22 billion.
Fearing political fallout from lawmakers opposed to deposit insurance expansion, FDIC staffers recommended that the agency drop the proposal in favor of a closer study of its potential costs. FDIC board members acquiesced.
"An unintended, significant expansion of deposit insurance coverage at a time that we are focused on limiting the moral hazard of deposit insurance would have been a mistake," former FDIC Chairman Ricki Helfer said at the time.
Recently, the FDIC's research division completed its study of the proposal's cost. Unlike the Fed, which estimated the expansion in federally insured deposits, the FDIC focused on actual bank failures.
As a result, it arrived at a dramatically different conclusion: If the proposed change to the joint account rules had been in effect in 1996, its price tag would have been just $80,000, the lead researcher said.
Even in 1988, the high-water mark for bank failures, the cost to the insurance funds would have been less than $13 million under the rule change.
The FDIC's research division acknowledged its study's imperfections. Its methodology, for example, did not weigh the revised rule's possible effects on depositor behavior.
But the researchers feel their estimate is reasonably accurate, and the agency is leaning heavily toward approval.
In fact, opponents of the plan may be hard to find.
Bert Ely, a banking consultant who wants to privatize deposit insurance, said the FDIC should go ahead with its simplification plan.
"The administrative savings to small banks alone probably exceeds the $80,000 at least several times," he said.
By contrast, it's not clear that the FDIC's proposal to simplify coverage of in-trust-for accounts will fare as well. Why? Because the FDIC's researchers could not come up with a cost estimate.
And in this debate, numbers make the difference.
