WASHINGTON — Though some lawmakers had hoped to address a permanent increase in the deposit insurance limit in the regulatory reform bill, it now appears likely that the issue will once again be kicked down the road.
Under a temporary provision expiring in 2013, the limit is $250,000. Many observers say that making this increase permanent is a no-brainer, pointing out that the previous $100,000 limit had not been changed in 30 years and returning to that level in three years could spark a liquidity shock.
But an effort to deal with it in the regulatory reform bill — an amendment offered by Sen. Ben Cardin, D-Md., to make the increase permanent — fell short, joining the growing list of failed legislative attempts to resolve the issue.
"There is a sense that it will be permanent, it should be permanent. There's a lot of support for that," said James Chessen, the chief economist of the American Bankers Association. "It's a question of: What is the right timing and what is the right vehicle? It doesn't appear like this bill was that vehicle."
Some still hold out hope an increase will be added by the conferees working to reconcile the House and Senate reform bills.
"I was surprised they didn't incorporate it" in the Senate version, "and I wouldn't be surprised to see it come out of conference," said an industry source who spoke on the condition of anonymity. "Raises in coverage … tend to come during a larger consideration, or after a crisis."
But like other amendments offered to the Senate bill, Cardin's did not get a vote. Observers cited several reasons, including that lawmakers may fear expanding the safety net, that the legislation is too complex to attract focus on such a narrow issue and that Congress is comfortable waiting until the 2013 deadline is closer.
Another obstacle is that the Deposit Insurance Fund is technically insolvent from the continuous wave of failures. "Clearly, the $250,000 limit is never going to be repealed," but "there's no rush to deal with it," said Robert DeYoung, a professor at the University of Kansas' business school and a former Federal Deposit Insurance Corp. economist. "Anything that makes it look like more taxpayer money is going to be at stake was prevented from being in this bill. This is consistent with: Taxpayers will never have to pay for a bailout again."
Industry support for a higher limit was strong during the years of congressional debate leading up to the 2006 deposit insurance reform law. The idea was then supported by Sen. Tim Johnson, D-S.D., a senior member of the banking committee and a main architect of the FDIC bill.
At that time, the House had passed a bill raising the limit to $130,000. A version proposed by Johnson would have done the same, though community banks wanted an increase to $200,000.
But amid objections to higher coverage from Sen. Richard Shelby, R-Ala., then the chairman of the banking panel, the final bill watered down those provisions to garner more support. Under the law, the FDIC covers certain retirement accounts up to $250,000 and can begin increasing the general limit more gradually next year, based on inflationary adjustments.
After Congress in 2008 increased the standard limit to $250,000 for one year as part of the financial bailout, supporters stepped up efforts again to make that increase permanent.
But lawmakers chose compromise again last year. In a bill giving foreclosure relief, Congress extended the coverage increase to Dec. 31, 2013.
Observers said the issue — if not folded into the final regulatory reform bill — is likely to come back as the deadline approaches, especially because Johnson is expected to lead the banking committee next year after current Chairman Chris Dodd leaves the Senate.
"If this were a couple years from now, this would have a lot more urgency," said Steve Verdier, a senior vice president at the Independent Community Bankers of America.
"It will depend a lot on what the climate is like at the time. If the Deposit Insurance Fund is in a much healthier position and the industry is in a position to pay the premiums, then it's going to be easier."
