WASHINGTON - Merrill Lynch & Co. and Salomon Smith Barney added about $28 billion of insured deposits during the first quarter, according to the companies' earnings reports.

In releasing its earnings Wednesday, Merrill said that it had moved $11 billion of uninsured money market funds to deposits in its banks in Utah and New Jersey. Since it started the program a year ago, Merrill has added nearly $60 billion to its deposits.

Citigroup Inc.'s Salomon Smith Barney unit announced Monday that it had added $17 billion of deposits since its similar program began in January. Salomon offers customers $600,000 worth of insurance coverage by using a network of six Citi-owned banks.

Government officials have repeatedly warned that the influx of deposits dilutes the ratio of insurance-fund reserves to insured deposits and could eventually erode the ratio below the statutory minimum of $1.25 for every $100 of insured deposits. If reserves fall below that point banks would be forced to pay insurance premiums for the first time since 1996.

Not surprisingly, banking industry representatives blasted Merrill and Salomon Wednesday, accusing them of abusing the deposit insurance system and of bringing banks close to a premium liability.

"I think the banking industry is becoming increasingly outraged," said Kenneth A. Guenther, president and chief executive officer of the Independent Community Bankers of America. "They are freeloaders who are putting pressure on the ratio fixed in law. If that ratio is breached, bankers face premiums caused by the actions of others."

However, a spokesman for Merrill Lynch countered that "the growth of deposits at our firm and other large, well-capitalized and well-run institutions poses no risk to the safety of the federal deposit insurance funds."

A spokeswoman for Salmon Smith Barney declined to comment.

Currently 92% of the industry pays nothing for deposit insurance. If the Bank Insurance Fund falls below 1.25% and is not recapitalized within a year, the Federal Deposit Insurance Corp. would charge all banks a 23 basis-point premium. The FDIC has said that such a move could trigger a $65 billion reduction in lending.

But Merrill and Salomon are not the only concern.

First-quarter earnings reports from community banks have indicated a significant jump in insured deposits. The FDIC said the trend started toward the end of 2000, and it noted an increase of more than $100 billion in insured deposits during the fourth quarter. Deposits could grow even faster if stock market volatility continues, analysts said.

For each $17 billion of deposits, the Bank Insurance Fund's reserve ratio declines by one basis point. The addition of Merrill and Salomon's deposits could move the ratio, currently at 1.35%, by nearly two basis points. And if the industry has another deposit growth spurt like the one in the fourth quarter, when $110 billion was added, the ratio could fall by nearly 6.5 basis points.

Karen Shaw Petrou, managing partner of Federal Financial Analytics, said the hike in deposits from the two brokerages, combined with the increased growth at community banks, could require a premium payment in the near term.

"I think this means that the prospect of a three- to five-basis-point increase in premiums is significant by yearend," Ms. Petrou said. "I think that the prospect of paying deposit insurance premiums again" will focus the industry's attention on deposit insurance reform, she said.

Indeed, since Merrill announced its program and Salomon followed suit, dilution of the funds has become a primary motive driving reform. When the FDIC suggested a list of reforms on April 5, it cited the spike in deposits as one of the main reasons Congress should act.

This week's news from Merrill and Salomon only hardened the FDIC's position.

"This example just serves to remind people of the concerns with the current system," Art Murton, director of the FDIC's division of insurance, said in an interview Wednesday. It "allows new deposits in without institutions' contributing to it. We have offered a framework that we think helps" address that, he said.

The FDIC has suggested several solutions, including adding fast growth as a factor when determining how much an institution should pay for insurance and paying rebates based on past contributions to the fund.

A spokesman for a large institution accused community bankers of blowing it out of proportion.

"The fund keeps growing and growing, and except for a couple of small-bank lobbyists who have been crying 'wolf' for a long time, there is no problem," said the source, who spoke on the condition of anonymity.

Diane Casey, president of America's Community Bankers, said Congress should give the FDIC the right to charge fast-growing institutions before the entire industry is charged premiums.

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