Let's Make the Big Players Pay Their Share

The influence of the big banks is quite evident in the Treasury Department's bank reform plan. This legislation has been tailored to their objectives and according to their philosophy - to the detriment of community financial institutions.

What we need are regulations to correct the flaws in the banking system and not simply a congressional initiative fueled by big bank interests.

If we're going to make the most of this opportunity, let's apply changes to the deposit insurance system that will have lasting value.

Assessments According to Risk

For example, all federally insured financial institutions invest their deposited funds and, obviously, some of those investments are of greater risk than others.

To pay for the government guarantee of deposits, financial institutions should pay assessments based on the level of risk these institutions impose on the guarantee system.

That is to say, a system of risk-based premiums or assessments should be imposed upon financial institutions. Such an arrangement would offset a significant portion of the cost of the government guarantee.

Institutions that create greater risk for the system should pay higher assessments. Safer and sounder institutions that pose little or no risk to the system should pay significantly smaller assessments. Those assessments would be paid to the insuring agency, the Federal Deposit Insurance Corp., as an add-on assessment or tax.

More than $100,000 on Deposit

Another rule should be that, on an annual basis, federally insured depositories would report to the Internal Revenue Service and to each depositor the average daily balance of that depositor's funds in that institution.

The IRS thereby would know the total amount of money a person has in federally insured deposit accounts, no matter where the funds are on deposit.

Individuals who exceed an aggregate average daily balance of $100,000 would pay an assessment or tax to the FDIC, regardless of the number of institutions they use. This fee would be imposed solely upon those individuals and organizations holding deposits in excess of $100,000.

In essence, the depositor would be paying directly for the government guarantee of funds on deposit beyond $100,000.

For example, the assessment might be 0.1% of the average daily balance in excess of $100,000. Depositors with higher balances would thus be paying their own way.

Acceptable to the Public

This would in no way be politically objectionable to the average American because the cost of the additional protection is being borne directly by those receiving the higher benefit. The cost of covering the first $100,000 of deposits would, as is now the case, be paid by the depository institution.

This plan would satisfy at least four major objectives:

* It would reestablish and maintain public confidence in our nation's banking system. All deposits would continue to be backed by the full faith and credit of the U.S. government.

* It would resolve the "too big to fail" dilemma. "Too big to fail" is an economic reality that creates a competitive disparity among financial institutions and will prompt, over time, the flow of funds from financial institutions "too small to save." Insuring all deposits in all federally insured institutions makes every depository too big to fail.

* The system is designed to pay for itself.

* The plan most likely would be acceptable to the ordinary citizen, who has less than $100,000 on deposit.

Undertaking this change in federal deposit insurance should not be delayed any longer than is necessary. Treasury Secretary Nicholas Brady would do a great service to this country if he would work toward turning this concept into reality.

Mr. Woodard is president of the North Carolina Alliance of Community Financial Institutions, the Raleigh-based trade association for 133 individually chartered and federally insured financial institutions.

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