WASHINGTON - In a move that could propel the debate over deposit insurance reform, Citigroup Inc.'s Salomon Smith Barney unit plans to launch a program next month that will offer as much as $600,000 of federal coverage to the unit's customers.

The move alarmed officials at the Federal Deposit Insurance Corp., who said rapid deposit growth caused by this kind of program would expose the bank and thrift insurance funds to a higher risk of loss without increasing reserves.

"It is important to realize that these kind of developments can have an impact" on the reserve funds, FDIC Chairman Donna Tanoue said in an interview Tuesday. "We have been trying to emphasize the sensitivity of the funds."

The Salomon accounts could add billions of dollars of insured deposits by "sweeping" money from uninsured money market accounts into interest-bearing, insured accounts at up to six Citigroup-owned banks. With a $100,000 federal guarantee on each account, that could give each customer a combined maximum of $600,000 of coverage.

Salomon said that a customer's deposits exceeding $600,000 would be covered by private insurance obtained by the firm.

What worries industry officials most is the prospect that all banks could be forced to pay deposit insurance premiums for the first time in four years if Salomon - whose effort may mean an even bigger stress on the system than a similar one by Merrill Lynch & Co. - moves enough money to dilute the ratio of federal reserves to insured deposits below the 1.25% minimum.

If the funds drop below that level and are not recapitalized within a year, banks would have to pay 23 cents for every $100 of insured deposits. The FDIC has said that could force banks to pay nearly $9 billion of premiums and could cause a $65 billion reduction in lending.

FDIC officials said Tuesday that the Salomon sweep accounts could push the reserve ratio below that minimum relatively quickly.

Merrill has already shifted $31 billion into insured accounts from its popular cash management accounts in the past six months. Industry analysts said Salomon's accounts could have a more profound impact by using multiple accounts to extend coverage.

"It is big news," said Karen Petrou, president of the ISD/Shaw Inc. consulting firm here. "I agree with the FDIC - the current structure of deposit insurance must change. The industry faces a choice of either changing the system or being faced with the sudden prospect of new premiums."

Currently, nearly 93% of banks pay nothing for deposit insurance. The FDIC has suggested 84 pages of possible reforms to the system, including requiring every bank to pay a small, steady premium that would be based partly on its deposit base. Many analysts said the Salomon move would give impetus to the FDIC's reform effort.

"This adds another form of stress on the reserve ratio," Ms. Petrou said. "The more these things happen, the more fragile the current structure becomes and the more pressure is put on the industry to come to terms with the inevitability of change."

Salomon announced the move in a statement sent last month to its clients. The unit said it will start offering the new accounts Jan. 19.

A Salomon spokeswoman argued Tuesday that, unlike Merrill, Citigroup's banks have paid deposit insurance premiums in the past. "The major deposits will be with Citibank and with Citibank FSB, which are both long-standing contributors to the funds. We believe this program is consistent with the firm's historical bank deposit activity."

Industry representatives argued that lawmakers need to address the issue quickly.

Diane Casey, president of America's Community Bankers, said Salomon's move not only could be "bigger than what Merrill Lynch has done" but also could prompt Congress "to take a look" at reforming the deposit insurance system. "Merrill raised attention on the issue by offering $200,000 worth of insurance. With Salomon now at $600,000 - this is clearly not what the deposit insurance system was intended to do."

What remains unclear is how the Salomon move would affect the rest of the FDIC's proposed changes, including one that would tie the coverage limit per account to inflation from 1980, effectively doubling it.

Some top policymakers have opposed a hike because it would encourage risky behavior by financial institutions and undercut market discipline. But Ms. Tanoue said Salomon's move raises "equity issues" that must be addressed. "Is it appropriate or fair that an organization that has multiple banks be able to offer its customers higher coverage than any other number of institutions?"

Community groups said the fact that Salomon could offer $600,000 of deposit insurance is proof that small banks need a coverage hike to stay competitive.

"I think that as these accounts are popular with the customers, that illustrates that federal deposit insurance is still very important to people," said Karen Thomas, director of regulatory affairs for the Independent Community Bankers of America. "It's another reason why its value shouldn't be eroded by inflation."

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