Banking Industry Would Pay Price for Reforms in Deposit Insurance

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In the debate over deposit insurance reform, the focus to date has been on the benefits. The two insurance funds may be merged, with coverage doubled to $200,000 per account. The size of the funds may be capped so institutions could eventually stop paying premiums. The Federal Deposit Insurance Corp. may be forced to refund some money it has already collected from banks and thrifts. But Congress rarely awards such gifts without some strings. Topping the list of trade-offs are higher premiums and added consumer protections in the form of tighter privacy controls, increased punishment for predatory lenders, and stricter Community Reinvestment Act compliance. Diane M. Casey, president of America's Community Bankers, raised the issue in a recent interview. "If you go to $200,000 and that safety net is there, what's the price?" Ms. Casey said. "You've got two prices. One is an actual premium and the other cost is what new regulatory burdens would come with it." Ms. Casey said that if coverage is increased, Congress might revisit the issue of lifeline banking, or low-cost checking accounts to low-income people. "If the banks ask for double the coverage and don't want to pay higher premiums, they will be faced with a laundry list of items to pay for it," said Bert Ely, an Alexandria, Va.-based independent financial consultant with Ely & Co. Banks may be forced to get a customer's written permission before sharing his financial information -- the "opt-in" privacy formula advocated by the White House, he said. Plans to rein in predatory lenders could also be attached. If consumer advocates successfully lobby for new protections or services, Karen M. Thomas, director of regulatory affairs for the Independent Community Bankers of America, said her members would still probably support legislation expanding deposit insurance coverage. "A lot of our members feel even if they have to pay for it, this is something that is going to benefit them over the long term," she said. Community bankers expect higher coverage would lead to more deposits, which could be used to fund more loans. More insurance also could convince customers to keep their money in hometown banks rather than invest it in large banks considered "too big to fail." "In a world of ever-larger financial conglomerates adequate levels of deposit insurance are critical for community banks to attract the funds they need in order to lend in their communities," she said. "Inflation has eroded the value of deposit insurance in half." Edward L. Yingling, lead lobbyist for the American Bankers Association, said it may be possible to win a clean deposit insurance reform bill, noting the industry won passage of the 1994 interstate banking law without any trade-offs. But he acknowledged that pushing for deposit insurance reform does involve both political and economic risks. "There definitely is a political risk," he said Monday. "The risks are the usual assortment of consumer issues like lifeline banking and CRA and then privacy is a risk on every bill these days." To keep unwanted provisions out of the legislation, the industry needs to position deposit insurance reform as beneficial to consumers and local communities, as well as a way to strengthen the entire financial system, Mr. Yingling said. …