To merge or not to merge?

That's an easy one for the Federal Deposit Insurance Corp. The agency has lobbied aggressively to combine the bank and thrift deposit insurance funds in order to form a bigger, safer pool.

So far, Congress agrees. Legislation approved last month by the House Banking Committee would merge the funds by Jan. 1, 2000.

But some industry experts say the gains from a merged fund are more feel-good than financial.

"It is an accounting exercise," said Bert Ely, a financial institutions consultant in Alexandria, Va. "I feel this whole fund-merger thing has been blown vastly out of proportion. ... The funds can continue indefinitely as they are."

Last fall, as part of the congressional deal to capitalize the thrift fund, bankers agreed to a merger of the funds by 1999, but only if the industries' charters were combined first.

"There is no direct advantage to banks to merge the funds," said R. Scott Jones, chairman of Goodhue County National Bank in Red Wing, Minn. The industry agreed to combine the funds only if thrifts became subject to the same regulations as banks, he said.

But thrift executives want to merge the funds right away and hash out the more contentious charter question later.

"It's hard for us to imagine now that SAIF is recapitalized why there shouldn't be one fund," said E. Lee Beard, president of First Federal Savings, Hazleton, Pa. "From the taxpayers' standpoint, I can't see any disadvantage to having a single fund."

But merger proponents must answer a key question: Why now?

The bank and thrift funds are stronger than ever, and financial institutions are reporting record profits.

The Bank Insurance Fund-which insures more than $2 trillion of deposits- topped $27 billion in March. The balance of the Savings Association Insurance Fund has nearly tripled since the end of 1995, reaching $9 billion on March 31. It insures $688 billion of deposits.

Each fund's reserve ratio exceeds 1.30%, significantly higher than the $1.25 for every $100 insured required by Congress. At the same time, no banks or thrifts have failed since August 1996.

"Certainly within the next three to five years, there's no risk there unless a meteorite drops out of the sky," Mr. Ely said.

But Arthur J. Murton, director of the FDIC's insurance division, said that's exactly why the funds should be merged soon. "A crisis environment is not the ideal time to make adjustments," he said.

A combined pool could better sustain downturns in either the thrift or banking industry, Mr. Murton said.

The thrift fund's glaring weakness is its geographic concentration, he said. In California, 89 institutions hold 24% of the deposits insured by the thrift fund. By contrast, bank fund deposits are most concentrated in New York, where 212 institutions hold 12.7% of the fund's deposits.

Executives at banks and thrifts agreed the thrift fund's California tilt is a concern.

"Because of the concentration of thrift assets on the West Coast, if there were several major failures, the SAIF would be in danger," said William T. McConnell, chairman of Park National Corp., a bank holding company in Newark, Ohio.

"The SAIF fund is smaller and more geographically concentrated, which becomes another logical reason for the merger," said James F. Montgomery, who was chairman of Great Western Financial Corp. before its recent sale to Washington Mutual Inc.

"The fund is simply too small to be viable on a long-term basis," said a June report by the SAIF Industry Advisory Committee. Continued consolidation only makes the problem worse, the report added.

Besides, banks already own 41% of thrift deposits, proponents noted. That number will rise as more banks and thrifts combine.

"Whether Congress gets around to merging them (the funds) or not, the industry is pulling a de facto merger," said Charles J. Koch, chairman of Charter One Financial Inc., Cleveland.

When Charter One completes its acquisition of Rochester Community Savings Bank, 23% of the thrift's deposits will be insured by the bank fund, he noted.

"It seems kind of ridiculous when you have two separate funds with common ownership," Mr. Koch said.

Because the bank and thrift industries tend to slump in separate cycles, a single, more-diversified fund would be more stable and less expensive, according to a study released in February by researchers at the FDIC and the Office of the Comptroller of the Currency.

Mr. Murton also portrayed the advantage of merging the funds in terms of fairness.

If a recession hits California and causes some sizable thrift failures, he said, the FDIC would raise premium rates on thrifts. That would be unfair to a thrift elsewhere in the country, which would have to pay increased premiums even if it were as well run, and well managed as a bank of comparable size, Mr. Murton said.

"Differences in premiums should reflect differences in risks to the fund, and not structural differences," Mr. Murton said. "A well-run thrift and a well-run bank may pose pretty similar risks."

Given the absence of a crisis, it's unclear how serious the battle over merging the funds will become.

Thrifts are united in favor, but banks adamantly oppose a merger unless the charters are united.

"The merger of the funds is not the key issue with bankers," said G. Lee Griffin, chairman of Bank One Louisiana. "The merger of the charters ... is."

Banks are in no hurry.

"There is no compelling near-term interest to merge the funds given that they are well capitalized," said James Chessen, chief economist of the American Bankers Association.

The SAIF industry advisory committee fears that merger of the charters will be delayed for several years by these and other legislative disputes and will become an "oh, by the way" issue, according to its report.

Ultimately, Congress is expected to break the impasse among warring industry factions and merge the funds. Memories of the $150 billion thrift bailout in 1989 still haunt lawmakers, who want to take every precaution to shield the taxpayer, said William A. Cooper, chairman of TCF Financial Corp., Minneapolis.

"It will happen whether the industry wants it to happen or not because they (Congress) don't want to go through this again," he said.

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