WASHINGTON -- The Senate Banking Committee, rejecting a Clinton administration proposal, approved a deficit reduction plan on Wednesday that raises revenue without new assessments on state-chartered banks.

The panel also rejected the administration's fallback position, which called for raising money by diminishing the rights of uninsured depositors to collect a share of the proceeds from failed institutions.

Impairing |Market Discipline'

That position -- proposed by Treasury Under Secretary Frank Newman and the deputy budget director, Christopher Edly, in a letter last month -- prompted an outcry among community bankers who feared large depositors would move to institutions deemed "too big to fail."

Mr. Newman said in a June 7 letter to the banking committee chairman, Sen. Donald W. Riegle, D-Mich., that excluding uninsured depositors from the preference system would save the Federal Deposit Insurance Corp. up to $3 billion over five years.

"Compelling the insurance funds to share in uninsured depositors' losses would give such depositors substantial de facto protection, which would impair market discipline by diminishing large depositors' incentives to prefer safer institutions," he added.

The budget reduction measure, which will be included in the Senate's version of the budget reconciliation bill, is patterned after a measure approved by the House last month.

In its budget, the Clinton administration proposed raising money by assessing state-charted banks to pay for examinations by the FDIC.

That idea was quickly rejected by the House Banking Committee.

Granting a |Preference'

Instead, the two bills substituted a variety of revenue raisers, including the idea of granting the FDIC and depositors a "preference" over other creditors in dividing the assets of failed institutions.

The two bills would confiscate $213 million of the Federal Reserve's surplus, through two installments starting in 1997.

Subscribe Now

Access to authoritative analysis and perspective and our data-driven report series.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.