Financial Regulators Act to Shield Taxpayers from Further Bailouts

Article excerpt

WASHINGTON (AP) - Bank and thrift regulators, in separate actions, took steps Tuesday aimed toward protecting taxpayers from paying for financial institutions' risky investments.

The Office of Thrift Supervision, which regulates 2,389 savings and loans, proposed a rule that would require the stockholders of an institution gambling on interest-rate changes to put more of their own capital behind the institution's investments.

S&Ls with more capital are better able to absorb losses and avoid failure, thus avoiding a bailout paid for by the government's deposit insurance program.

Since November 1989, S&Ls have been required to hold more capital against loans and other investments with a higher risk of default. And, a similar risk-based system takes effect for banks on Jan. 1.

However, Tuesday's proposal is the first by a financial regulator to link capital levels to the danger posed by interest-rate swings.

Meanwhile, the board of the Federal Deposit Insurance Corp. voted 5-0 on Tuesday to ask Congress for the power to tie deposit insurance premiums to risk.

Currently, all banks and S&Ls pay the same premium, no matter how risky their operations. Banks, starting Jan. 1, will pay 19.5 cents per $100 of deposits, up from 12 cents this year. S&Ls have been and will continue paying 23 cents.

Critics contend this unfairly forces sound institutions to subsidize high-fliers. Other kinds of insurance give breaks to better customers. Safe drivers, for instance, pay less for auto insurance and non-smokers pay less for life insurance.

A study prepared by the FDIC for Congress recommends exploration of two approaches for varying premiums. One would charge lower premiums to banks and S&Ls that hold a larger capital cushion. The theory is that institutions willing to risk more of their owners' money before failure should pay less for their insurance, much as a homeowner willing to pay a larger deductible should pay less for theft insurance.

Another approach outlined by the study is having private insurance firms set premiums based on the principal of market competition. …