Newspaper article THE JOURNAL RECORD

A New Breed of Banking `Gunslinger' Shifts Business Risk to Government

Newspaper article THE JOURNAL RECORD

A New Breed of Banking `Gunslinger' Shifts Business Risk to Government

Article excerpt

Jr. WASHINGTON - A sharp rise in bank failures during the past few years has put the spotlight on the multibillion-dollar fun ds that insure depositors against loss: the Federal Deposit Insurance Corporation and the Federal Savings and Loan Insurance Corporation.

The funds have performed well over the years to guarantee that nobody with an account under a specified amount, now $100,000, will lose money if a bank goes under. Now, however, it has become clearthat some basic modifications should be made if the funds are not to be abused. Some overly aggressive bankers seem, in fact, to regard the insurance funds more as devices for protecting their institutions - and their jobs - than for protecting the general public.

What has happened is that the meritorious drive for financial deregulation has produced some very worrisome side effects. Armed with new powers, a new breed of banking ""gunslinger'' has in effect sought to use federal deposit insurance to improperly transfer business risks to the government. Although the insurance corporations are financed by premiums paid by the banks and thrift institutions, if their resources are exhausted by payouts, Congress and the taxpayers would have to step in.

Increasingly, the insurance system is becoming what insurance professionals call a ""moral hazard'' - a situation in which the very fact that the coverage exists encourages an activity it is supposed to protect against. That is why, for example, one cannot insure oneself against suicide or buy fire insurance for twice the value of a house.

""By actually encouraging depository institutions to assume more risks,'' said Catherine England, an analyst at the Cato Institute, the deposit system as presently constructed has become ""a potentially destabilizing force.''

A number of anomalies arise from the interaction between an increasingly deregulated market and the long-established practices of federal deposit insurance.

One is that big banks, solely because of the effect that their failure would have on the international banking system, are far more likely to be rescued by the government than small banks. This also means that those who have more than $100,000 on deposit at a major bank are more likely to get all their money back than those who put their money in a lesser institution. Indeed, in seeking to curb a ""run'' on the Continental Illinois Bank and Trust Company, the FDIC waived its $100,000 insurance limit.

Another anomaly is the inequity of the present system of levying deposit-insurance premiums. All federally insured institutions now pay annual premiums of 1-12th of 1 percent of domestic deposits, regardless of the risks they run. …

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