Gary H. Stern is on a quest to restructure deposit insurance.

Without reform, the president of the Federal Reserve Bank of Minneapolis said the banking industry will never get full securities and insurance powers.

"That would be like putting the cart before the horse," he said in a rare interview. "As you expand powers, you expand risk. That is a bad idea in a world of moral hazard. So you should reduce the moral hazard first."

His plan is amazingly simple. The Federal Deposit Insurance Corp. would continue to guarantee deposits of $100,000 or less.

Even at institutions the government deems "too big to fail," customers would receive 100% of their deposits below $100,000 and 80% above $100,000.

The FDIC could pay more than 80% if funds were left over after the bank was liquidated and the insurance fund was reimbursed. Also, Mr. Stern said the 80% cutoff was not set in stone, noting it might change in future drafts of his proposal.

"We are not trying to punish depositors with more than $100,000," he said. "Rather we are trying to create incentives for market discipline. This seems to be a relatively simple, straightforward way to do it."

Mr. Stern will push his plan Thursday at an FDIC-sponsored symposium on the future of deposit insurance.

So far, however, he has picked up little public support. Community bankers blast any effort to modify deposit insurance, which they see as one of their key strategic advantages over finance companies and brokerages.

"We are definitely not in favor of his plan," said James A. Clark, president of Minnstar Bank in Lake Crystal, Minn. "It is strictly to the benefit of large banks and the detriment of community banks."

"The current system has worked well," said Pat DeBois, chairman of First State Bank of Sauk Centre, Minn. "I don't believe it is good to change just for the sake of change."

While some big banks support Mr. Stern's plan, many wish he would go further. For example, Norwest chairman Richard M. Kovacevich said he prefers a Bankers Roundtable proposal that would terminate the government's backing of the insurance fund and eliminate the "too big to fail" doctrine.

"Gary's proposal does not do this," Mr. Kovacevich said. "I wish he would go all the way. But his step is far superior to what we have today."

But Mr. Stern questions whether more radical options would work. "A private deposit insurance fund is not the same thing as government backing," he said. "I'm not sure it would maintain the kind of systemic stability you need to have in the banking system."

To build support for his more modest change, he brought bankers into the reform process early. He convened in May a group of 12 executives, including officials from Norwest, First Bank System, and Community Bancshares. He held two three-hour meetings, but made little progress.

"Our hope was we could find in the ninth (Federal Reserve) district a combination of proposals everyone could agree on," he said.

The meetings, which ended with no accord, left him convinced that only limited change was possible. "We are learning there is some value to keeping things straightforward and narrow," he said. "I didn't get a sense that a major extensive proposal would be successful."

Mr. Stern said he has difficulty understanding community bank opposition to his plan. Currently, the "too big to fail" doctrine gives large banks a competitive advantage over small banks because depositors know they will not lose funds if the institution fails. Limiting recovery of uninsured funds would level the playing field, he said.

"I wouldn't expect wild enthusiasm among community bankers," he said. "But I don't understand why they don't get it."

As a condition of the interview, Mr. Stern declined to discuss himself or most other banking matters.

He is a California native who earned a PhD in economics in 1972 from Rice University in Houston. Mr. Stern, 53, was a partner at a New York- based economic consulting firm and has taught at Columbia University, Washington University, and New York University.

He spent seven years at the Federal Reserve Bank of New York, rising to manager of domestic research. He joined the Minneapolis Fed in 1982 as research director and became the chief financial officer a year later. He became president in 1985 and was reelected in 1996.

He is the mastermind behind the Minneapolis Fed's impressive new facility. Its $100 million cost was harshly criticized by lawmakers as excessive.

But Mr. Stern praises the new facility, which overlooks the Mississippi River, as more efficient and secure than the old building, which was constructed in 1972. For instance, all of the cash is moved from the counting rooms to storage by two robots.

His stance on deposit insurance has won him respect from executives of large banks. "I have very high regard for him," Mr. Kovacevich said. "He is very knowledgeable and experienced in all aspects of Federal Reserve policy, including monetary policy, supervision, and regulation. He is an extremely capable executive."

Community bankers were less laudatory. Several declined to describe his tenure, and one labeled it "adequate."

Although reluctant to discuss his policy views outside deposit insurance, Mr. Stern did address the issue of whether the government subsidizes banks through that safety net.

Members of a Fed advisory council - including Mr. Kovacevich - urged Chairman Alan Greenspan last year to stop insisting that the government subsidizes the industry, arguing that banks pay for all the services they receive.

But Mr. Stern, who concedes he brings a public policy perspective to the debate, said bankers clearly are subsidized because they get more than they pay for. "Customers get the assurance of deposit insurance and banks get the discount window and the payment system," he said. "That seems to me to be a pretty substantial package."

He also dismisses bankers' charges that they pay for the safety net by complying with the Community Reinvestment Act and other consumer regulations. "That is not the real issue," he said, adding, "These are in place for public policy" reasons.

Mr. Stern's interest in deposit insurance is linked to his monetary policy responsibilities. Many studies have shown that long-term economic growth is dependent upon a healthy banking industry.

But a deposit insurance system that encourages excessive risk-taking could topple the industry, he said. That's what happened during the 1980s thrift crisis when investors chased the higher yields that ailing institutions offered without accepting greater risk.

"Long-term growth is in everyone's best interest," he said.

He also said he wants to protect taxpayers, who ultimately must cover any shortfalls in the deposit insurance funds.

"We know it is something that can cause problems and be large and expensive to resolve," he said. "But it is correctable. It is not something we have to wring our hands about."

Mr. Stern said the country has a unique opportunity now to change deposit insurance. The economy is healthy, banks are earning record profits, and the industry wants to move into new businesses.

"You can have a rational discussion of it now," he said. "I don't want to unhinge depositors by talking about it during a banking problem."

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