After a year of intensive work, the Federal Deposit Insurance Corp. presented its deposit insurance reform recommendations April 5. The House Financial Services Committee staff, following Chairman Michael Oxley's welcomed decision to make this issue a top priority, is holding informal meetings with industry groups preparatory to formal hearings that could begin as early as May 16.

It is widely recognized that the federal deposit insurance program has done a very good job of enhancing financial stability and consumer confidence in the American banking system. But it's been 10 years since the last systematic congressional review of our deposit insurance system, and it has to be modernized and strengthened.

The major issues that have emerged include: establishing a pricing structure so that rapidly growing "free-riders" pay their fair share into the deposit insurance funds (these free riders like Merrill Lynch and Salomon Smith Barney also offer coverage levels well beyond the reach of community financial institutions); smoothing out premiums to avoid wild swings caused by the hard target reserve ratio (so banks do not pay unreasonably high premiums when they can least afford it); providing appropriate rebates of excess fund reserves; preserving the value of FDIC protection and coverage for the future by substantially increasing coverage levels and indexing these new base levels for inflation.

For community bankers, the issue of increased deposit insurance coverage has been front and center in the debate. More coverage would help address the funding challenges and competitive inequities faced by community banks and let them compete for deposits in a reshaped economy. Any reform package would fall far short in their eyes if it does not include a substantial increase in coverage levels, and indexation.

Stated simply, inflation is severely eroding the value of FDIC protection. The real value of $100,000 coverage is only about half of what it was in 1980 when it was last increased. In fact, today's deposit insurance is worth less in real dollars than it was in 1974 when it was set at $40,000.

Critics of pending congressional bills to substantially increase and index coverage levels contend that the 1980 increase to $100,000 was unjustified and increased the resolution costs of the savings-and-loan crisis. Overlooked, perhaps, is the fact that the Federal Reserve Board advocated this increase at the very time its monetary policies were driving the prime rate over 20% in a climate of interest rate deregulation. Also overlooked is the fact that the new $100,000 coverage limits helped stem depositor panic; thousands of thrifts and banks failed in the early 1980s because they held long-term, fixed-rate loans.

In a just-released study of the FDIC reform proposals, Alan S. Blinder, a prominent economist and former vice chairman of the Federal Reserve System's board of governors, says, "Frankly, we are a bit baffled by the strength of this opposition." So are we. Mr. Blinder further notes that it is "axiomatic" that the new coverage limit, "wherever it is set initially, should be indexed."

Consumer, Small-Business Stake

Increasing deposit insurance is essential to the consumers and small businesses in thousands of local communities that rely on their local bank for economic vitality.

From the customer's perspective, the current coverage level is inadequate. In particular, retirement savings require a higher limit. Today, accumulating $100,000 in savings for education, retirement, or long-term-care needs is not a benchmark of the wealthy. A 30-year-old with a modest $40,000 income who saves $4,000 a year at a conservative 6% return would accumulate close to $500,000 by age 65. A working couple would accumulate twice as much.

With the graying of the population, safe-savings opportunities are needed more than ever. An insured savings option is becoming even more crucial now that budget surpluses are reducing the supply of Treasury securities.

Small businesses are key customers of community banks, which in turn are premier providers of credit to these businesses. A 2001 survey by the American Bankers Association found that half of small-business owners think the current level of deposit insurance coverage is too low.

When asked what they would do if coverage were doubled, 42% said they would consolidate accounts now held in more than one bank; 25% would move money to smaller banks; and 27% would move money from other investments into banks.

Consumers and small businesses shouldn't have to spread their money around to many banks to get the coverage they deserve. They should be able to support their local banks, and local economies, with their deposits. The less deposit insurance coverage is really worth because of inflation erosion, the less confidence Americans will have in the protection of their money, and the soundness of the financial system will be diminished.

Mr. Guenther is the president and chief executive officer of the Independent Community Bankers of America, Washington.

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