To the Editor:
Bert Ely's June 6 comments about deposit insurance being unsubsidized (Greenspan's Deposit Insurance Subsidy Argument Is Nonsense," page 3) do not take a long enough view.
While the FDIC and its insurance are now supported totally by the bank and thrift industries, part of the risk is, in fact, shifted to a third- party credit enhancer. That party is the U.S. government, with its pledge of full faith, credit, and taxpayer backing.
To assess the value of this enhancement, it must be understood that today's benign financial environment and the present legal/regulatory framework will not endure unchanged.
For example, in the course of the next hundred years, what is the risk that the FDIC will need to draw on its backup line of credit from the Treasury? Over the very long haul, will today's supervisory tools, or new ones forged (or neglected) in the absence of crisis, be effective? Will the current $1.35 per $100 in the insurance fund be diluted by "other needs"? Will there be a meltdown in the increasingly connected securities, insurance, and banking industries?
No one knows the answer to these questions or the even more critical ones we do not know to pose. However, history makes painfully clear that banking risk will reassert itself in the long run.
A rough pricing for this risk can be gleaned by spreading the $150 billion-plus cost of the S&L bailout over 100 years. Of course, a more accurate, actuarially driven look back would also factor in an appropriately modernized interpretation of costs of past banking industry problems. Examples include:
The banking crisis of 1907.
The agricultural difficulties of the mid 1920s.
The Great Depression.
The failure of numerous "state" deposit insurance systems.
The energy and agricultural problems of the mid-1980s.
The banking industry's near crisis in 1991.
Such long-term risk to the government, which prices minimally at $1.5 billion of expected losses per year, in non-negligible. Since Uncle Sam receives no fees for bearing this risk of standing by to bail out the deposit insurance system should the need arise, a government service is being provided.
The term commonly used to describe such an unpaid service is "subsidy."
Warren G. Heller
Research director,Veribanc Inc.
Wakefield, Mass.
