The Federal Deposit Insurance Corp. announced last week that it will host a January symposium on the role of deposit insurance in a fast changing financial world.
Although acting FDIC Chairman Andrew C. Hove promised the agency will be "open-minded," his ardent defense of the 64-year-old government system of backing bank deposits left little room for compromise with advocates of major reforms.
"A number of people also recently have been calling for dramatically scaling back federal deposit insurance or eliminating it-notions that we have frequently and forcibly responded to and will continue to oppose until critics propose a basis for public confidence that has the absolute certainty that a federal government backing offers," Mr. Hove said Oct. 5 at the annual American Bankers Association convention.
Mr. Hove, a career community banker, disputed arguments that deposit insurance exists mainly to protect small depositors.
Instead, he insisted, it preserves faith in the payments system and- along with government supervision and the Federal Reserve System's emergency lending authority-prevents the economy from crashing in a crisis.
Eliminating deposit insurance wouldn't rid banks of regulation - as many hope - because the government still would have to maintain financial stability, he added. "Without deposit insurance, there would still be a need to regulate banks," he said.
The symposium will not change his mind on those issues, Mr. Hove said in an interview last week. "I won't back down from that at all."
However, smaller "modifications" are open for debate, such as a cap on the bank and thrift insurance funds' reserves or an expansion of the rating system that the agency uses to assess premiums on institutions, Mr. Hove said.
And he emphasized the symposium will address issues tied to the congressional debate over financial modernization: a merger of the thrift and bank funds and the scope of the government's guarantee as banks merge with insurance and securities firms.
"Clearly banking is headed toward a new world, though the exact route it will take to get there is a bit uncertain," he said.
Observers are skeptical that the upcoming conference of about 100 regulators, academics, bankers, and others will lead to watershed policy changes at the FDIC.
But merely holding the gathering shows the agency feels pressure from reforms posed this year by two Federal Reserve bank presidents and the Bankers Roundtable.
"This is a good sign that the debate over deposit insurance and accompanying regulation is heating up," said Bert Ely, a financial industry consultant in Alexandria, Va.
The FDIC "cannot prevent the discussion from occurring," he said. "They want to be at the table and try to put their spin on it."
Gary H. Stern, president of the Federal Reserve Bank of Minneapolis, has been arguing that the government should encourage market discipline by refusing to rescue the largest financial institutions. He recommends putting uninsured depositors on the hook for up to 20% of their deposits above $100,000 if an institution fails.
William J. McDonough, president of the Federal Reserve Bank of New York, said in September "that our approach to deposit insurance needs to be reconsidered so as to minimize the potential for moral hazard and to focus only on those small depositors that truly require protection."
In May the Bankers Roundtable proposed that the government should stop backing the deposit insurance system with its full faith and credit and rescuing the largest financial institutions.
