WASHINGTON - Government witnesses on Wednesday threw their weight behind legislation that would merge the bank and thrift deposit insurance funds, but they objected to the industry's wish list of add-ons, such as a premium rebate.

"The timing for a merger could not be better, given the current health of the bank and thrift industries and the condition of the funds," Federal Deposit Insurance Corp. Chairman Donna A. Tanoue testified before House Banking's financial institutions subcommittee. "A merger is unequivocally in the best interest of the American taxpayer."

Treasury Assistant Secretary Gregory A. Baer agreed that creating a single, larger fund would reduce its vulnerability to catastrophic loss from a single institution or sector by diluting risk.

The American Bankers Association said its support is contingent on capping the size of a combined fund and rebating any money above that cap. The Independent Community Bankers said it wants Congress to double deposit insurance to $200,000 and index that amount to inflation. A third trade association, America's Community Bankers, said that although it favors such sweeteners, it would support a bill that would simply merge the funds.

By law, the FDIC must maintain $1.25 in the fund for every $100 in deposits it insures. Currently, the bank fund holds $1.38 per $100, and the thrift fund holds $1.44. A combined fund would have a reserve ratio of $1.40 - still well above the statutory minimum.

However, Ms. Tanoue argued that this is the wrong time to discuss setting a cap on the fund or rebating premiums to banks.

"Failures in 1999 will cost the Bank Insurance Fund around $1 billion, and the fund finished 1999 smaller than it was in 1998 - the first decline since 1991," she said. "These losses were, for the most part, unexpected. We live in a volatile world. And while some banks are seeking rebates, it is important to note that more than nine out of 10 banks and thrifts currently pay no insurance premiums."

No one knows how long the economic boom will last, and the FDIC must be prepared for a downturn, Ms. Tanoue said. Regulators also need time to assess the changes that will result from November's financial reform law.

"The true test of an insurance fund comes during the bad times, and I would much prefer to have this discussion at the other end of the [economic] cycle," she said.

Mr. Baer said regulators cannot, with any degree of confidence, pick a level at which to cap the fund. With 90% of banks and thrifts not paying for deposit insurance, "their marginal cost of taking uninsured liabilities and turning them into insured liabilities is zero," he said. "If you were to go to paying rebates, you would have, in effect, a negative premium."

ABA president Hjalma Johnson disagreed, saying banks and thrifts are entitled to the $4.2 billion in reserves that the funds hold above the 1.25% minimum. To the argument that it would be too difficult to set a safe cap for the fund, he responded, "I think we have people with the ability to analyze that and enough collective intellect out there to come up with a reasonable number."

Rep. John J. LaFalce, House Banking's ranking Democrat, indicated in a statement prior to the hearing that lawmakers do not want to mediate a dispute between regulators and the banking industry this year.

"If we cannot proceed to independently and quickly act on the fund merger issue alone, then I believe we are forced to leave these issues to further examination and a later day," the New York Democrat said.

Subcommittee chairwoman Marge Roukema called the hearing to gauge support for merging the funds. "After hearing from both panels, I am tempted to say that you are both right," the New Jersey Republican said. "Everybody is making a good argument."

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