WASHINGTON — Merrill Lynch & Co., which for months has shied away from responding to criticism that the brokerage house’s aggressive move into banking threatens the deposit insurance system, has decided to enter the reform debate.

In a comment letter filed last week with the Federal Deposit Insurance Corp., the company predictably defended itself against charges that its addition of more than $48 billion to insured deposits at banks in New Jersey and Utah during the past nine months could dilute the Bank Insurance Fund to the point that all banks would have to start paying premiums for the first time in five years.

Some have said Merrill and other fast-growing banking operations should have to pay a substantial deposit insurance surcharge.

Though it opposed such surcharges, Merrill acknowledged that some reform is needed and endorsed regular premiums priced according to a banking operation’s risk profile rather than its size.

“Deposit insurance premiums should be assessed equitably, not punitively,” wrote Peter C. Hagan, chairman of Merrill Lynch Bank USA in Plainsboro, N.J. “We would oppose the imposition of any deposit insurance premiums that constitute a tax on product innovation or arbitrarily discourage the flow of funds into insured depository institutions.”

Mr. Hagan pointed to the FDIC’s options paper released in August, which suggested a number of reforms to the system but which said that a surcharge “will result in rather arbitrary distinctions and create incentives for manipulating the system.”

The issue has come to the forefront of the FDIC’s reform effort, with more and more bankers citing Merrill’s movement of funds from uninsured “sweep” accounts into insured deposits as a key reason that lawmakers should take action. But Mr. Hagan said the program is fulfilling the intent of the Gramm-Leach-Bliley Act of 1999.

“This combination of financial services,” he wrote, “permits a customer to conduct both traditional bank transaction activities, such as checking and debit card transactions, and securities brokerage activities through a brokerage account and to receive a single monthly statement showing the banking and brokerage activity. This cross-marketing of products between a broker-dealer, its affiliated banks, and other financial services companies is precisely the type of innovative financial activity that” Gramm-Leach-Bliley “encouraged the financial services industry to engage in.”

Furthermore, Mr. Hagan argued, the agencies can use existing authority to rein in institutions that they conclude could jeopardize the funds.

“We note that the safety and soundness measures … have provided the bank regulatory agencies with ample authority to prohibit unhealthy institutions from engaging in rapid or mismanaged growth,” Mr. Hagan wrote. “These measures include the prompt corrective action regulations, which establish capital categories for insured institutions and a scheme of regulations that permits greater regulatory control over institutions in the lower capital categories.”

The brokerage firm also weighed in on the debate about the funding of the deposit insurance reserves. Mr. Hagan said the company endorses the FDIC’s “user fee” — a small, steady premium determined by the institution’s risk to the funds. Though the FDIC’s paper specifically mentions an institution’s insured deposit size as one of the factors that would determine its premium, Mr. Hagan said other things are more important.

“We agree with the options paper that deposit growth per se does not present risks to an institution,” he wrote. “Instead, institutions should be evaluated on more specific indicia of risk, i.e., capital adequacy, management expertise, and asset quality.”

Community bankers have long argued that Merrill’s increase in funds could lower the ratio of federal reserves to insured deposits below the statutory minimum of 1.25% and thus trigger premiums for all institutions.

Though not addressing that issue directly, Mr. Hagan said his company supports eliminating the statutory minimum and replacing it with a “soft” target — a ratio that could be changed as needed by the agency to reflect economic conditions.

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