Each depositor insured to at least $250,000 per insured bank

2 April 2002
The Wall Street Journal
(Copyright (c) 2002, Dow Jones & Company, Inc.)

Your March 14 page-one article "A Solution in Search of a Problem" failed to discuss the real issues behind recent congressional interest in the issue of deposit insurance reform.

First, banks and thrifts -- not taxpayers -- fund the deposit insurance system. Taxpayers did not pay for the recent failure of NextBank, nor would they if the FDIC coverage limit had been higher.

By focusing on the issue of coverage, your piece missed the important structural reasons why Congress should pass deposit insurance reform. In response to the bank and thrift crisis of the late 1980s and early 1990s, Congress revamped the deposit insurance system, and on the whole it works well. But there are also flaws that could have an adverse impact on banks and thrifts, the FDIC, and the overall economy.

Under the existing law, the vast majority of banks and thrifts pay nothing for their deposit insurance during good times. And during sustained bad times, the FDIC could be forced to charge steep premiums to replenish the deposit insurance fund. It is not logical to increase the financial burden on banks and thrifts when they are least able to bear it and limit credit availability when the economy most needs it.

Any responsible reform effort should be based on the FDIC's ability to charge steady premiums over time and to base its premiums on the risk in individual banks. This is fundamental to the business of insurance, and the Treasury, the Federal Reserve Board and many House and Senate leaders agree with us on this recommended change to the current system.

With respect to coverage, the FDIC has recommended that the current base level of coverage, $100,000, be indexed for inflation. Indexing ensures that the value and important benefits of deposit insurance will not be diminished over time. Indexing also removes an economic decision from the political arena and avoids the unintended consequences of sudden, large increases in the coverage limit.