The Clinton administration recently revealed its decision to seek a merger of bank and thrift regulatory functions into a single, independent agency, as the cornerstone of its legislative agenda for banking next year.

Given this agenda, the time has come for banks and thrifts to begin talks on another potential merger between the Bank Insurance Fund and the Savings Association Insurance Fund.

Thrifts support regulatory consolidation but worry that they could be second-class citizens in a new, bank-dominated agency. Thrifts are concerned, above all, about the prospect of paying significantly higher premiums than banks will pay for deposit insurance.

The premium disparity arises from a congressional requirement that surviving thrifts divert close to $800 million of their premiums each year to pay the interest on Financing Corp. bonds.

Question of Premiums

A formal merger of the funds would spread the FICO burden to bank fund members. For obvious reasons, then, thrifts focus on the deposit premium issue and on the advantages of a merger of the two insurance funds.

But banks, too, stand to gain from such a merger, and it is in their interest to help thrifts overcome this competitive disadvantage, although terms acceptable to bankers would need to be negotiated.

A merger of the funds could set the stage for a much more immediate reduction of deposit insurance premiums than is now likely.

Some bankers have already discussed the possibility of pledging assets to the bank fund that would bring it to the required 1.25% reserve level, in return for an immediate reduction in premiums, borrowing a page from the credit union play book.

There is only one reason why they are being rebuffed - government officials, too, are worried that a substantial premium differential will generate more SAIF losses.

Answering to Taxpayers

As long as Congress and the administration are worried about a weakened thrift fund, which exposes taxpayers to continued risk, no one's premiums will be reduced. Like it or not, the two funds are already linked on a de facto basis until both are financially sound.

A merger of the funds would also facilitate bank-thrift mergers where they make economic sense. Banks could purchase thrifts without having to worry about the possibility of a significant premium differential down the road.

Congress should consider legislation merging the funds in the context of regulatory consolidation. There would be obvious support for legislation that would make the possibility of having to tap taxpayers again much less likely.

The financial condition of the two funds is not equal, so some negotiation between the industries is essential.

But a combination of the funds offers a unique opportunity to achieve a more rational deposit insurance, structure, and banks and thrifts must speak with a united voice to make it happen.

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