Supporters of merging the Bank Insurance Fund and the Savings Association Insurance Fund have a strong ally in the Office of Thrift Supervision, which oversees the majority of institutions insured by the SAIF.

A congressional subcommittee will hear testimony on the subject next week, and OTS Director Ellen S. Seidman says her agency will file a written statement in favor of merging the funds.

"It is time," she said in an interview last week. "At this point, the SAIF no longer has any real independent identity."

The thrift fund was established in 1989 to insure the assets of thrifts that survived the S&L crisis of the late 1980s. But mergers among banks and thrifts accelerated in the 1990s, and the thrift fund's mission became less clear. Thrift deposits bought by banks continue to be insured by the fund, even if the institution that originally accepted the deposit ceased to exist.

Just over half of the deposits insured by the thrift fund are held by institutions regulated by the OTS, Ms. Seidman said. National banks hold 22% of SAIF-insured deposits, state-chartered banks hold 16%, and FDIC-supervised state savings banks hold 8%.

Roughly 15% of the deposits insured by the Bank Insurance Fund are held by thrifts.

"There is no longer any meaningful differentiation between the funds," Ms. Seidman said.

A merger also makes sense from a risk management perspective, she argued. "If there is anything insurers hate, it's a concentration of risk."

For instance, Bank of America Corp. holds approximately 8.67% of all deposits insured by the bank fund, while Washington Mutual Inc. holds a similar percentage of deposits insured by the thrift fund. Merging the funds would reduce Bank of America's stake to about 6%. Washington Mutual's share would fall to 2%.

Although the OTS keeps the lowest profile of the major bank and thrift regulatory agencies, in several recent speeches Ms. Seidman has been quite vocal on major policy questions.

"I think it's important that the public know that we at the OTS think about more than just the unitary thrift charter," she said.

Ms. Seidman will join other regulators appearing before a congressional hearing on bank failures Tuesday. Among other issues, she is expected to point out flaws of the prompt corrective action rules, which require supervisors to take increasingly severe actions against an institution as its capital declines. Once capital sinks to 2%, examiners are supposed to close the bank.

Unfortunately, capital levels are too inexact to allow regulators to prevent a loss to the insurance funds in the event of failure, according to Ms. Seidman.

Regulators use backward-looking call report data to determine when a bank is undercapitalized, and then are given a 90-day window to close the institution.

"We've got to recognize that in a changing world, 2% equity on a call report … may not mean that there is a significant economic cushion when it comes time to close the institution," she said.

Ms. Seidman recommended that regulators adopt a more proactive approach, encouraging the institutions they supervise to focus more on risk management, long-term strategic planning, and measuring counterparty risk.

"If institutions themselves are thinking in terms of risk management, clearly that will give us a handle on these problems at an earlier point," she said.

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