Could Uncle Sam again be caught holding the bag in a banking
scam on the scale of the savings and loan debacle?
Knock on wood, probably not.
Last year Congress ordered federal deposit insurers to take
over ailing banks before the institutions managed to throw good
taxpayer money after their own bad debts. And under rules that go
into effect next year, banks that are inclined to take chances will
be obliged to buffer the risk with more capital.
But safety is only half the deposit insurance story; the other
half is efficiency. While the United States Treasury is now better
armored against assaults from future Charles Keatings, deposit
insurance remains a crude regulatory tool that only a bureaucrat
Federal regulators must still make subjective calls about when
to padlock the doors on friendly neighborhood banks. Moreover,
insurance premiums still do not mirror the risks of individual bank
portfolios, a failure that implicitly subsidizes the high rollers.
It is no surprise, then, that many economists see deposit insurance
as a necessary evil, the inevitable price of securing the national
Many, but not all. Bert Ely, who runs Ely & Co., a consulting
firm in Alexandria, Va., thinks he knows a better way: private
And he has found an patron in Thomas Petri, a Republican
congressman from Wisconsin with a soft spot for smart schemes to
buy better government for less money.
The banking industry already insures itself. Premiums go into a
pool, with the proceeds dedicated to making good on individual
banks' promises to depositors. But civil servants, not the
contributors, are in charge of setting premiums and keeping banks
on the straight and narrow. And without a market to discipline the
process, regulators are unlikely to make economically rational
That is where the Ely-Petri plan fits in. It would eliminate
the middleman, converting deposit insurance into a true
industrywide self-insurance plan. Banks would be required to obtain
insurance from syndicates of other banks and perhaps other
financial institutions with deep pockets. The syndicates, in turn,
would be required to reinsure with other syndicates against losses
of a magnitude that could wipethem out. And to cope with the
incredibly unlikely event of the whole system running through its
capital, the government would reinsure the reinsurers.
Syndicates, managed by professional agents, would set premiums
at any level they wished and negotiate their own criteria for
withdrawing coverage _ much the way a fire insurer deals with
corporate policyholders. …