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WallStreet Journal
Friday October 10, 3:26 am ET
By Damian Paletta, Carrick Mollenkamp and John D. McKinnon
Friday October 10, 3:26 am ET
By Damian Paletta, Carrick Mollenkamp and John D. McKinnon
The move to back all U.S. bank deposits, which is only in the discussion stage, would be aimed at preventing a further exodus of cash from financial institutions, including small and regional banks, some of which are buckling under the strain of nervous customers. In recent weeks, customers have pulled money out of some healthy community banks under the assumption that the government will only insure all the depositors of larger banks in the event of a failure.
To remove the ceiling on deposit insurance, multiple government agencies would first need to agree that there was a "systemic risk" to the economy, thereby invoking a rarely used legal power. Amid repeated efforts by the federal government to prop up ailing institutions, some bank regulators say the move is justified.
It's not clear that either idea will become reality, and U.S. officials downplayed expectations of any announcement this weekend. But as the crisis deepens and stocks continue to tumble, pressure is building on the Bush administration to find a solution that goes beyond the $700 billion financial rescue plan recently signed into law. Having the government back bank lending would effectively entail the U.S. being the backstop for the country's financial system.
[..]
In the U.S., some $99 billion in just one type of bank debt is coming due between now and the end of the year. Hundreds of billions of dollars will need to be paid in the U.S. and Europe. Government backing would make it easier to issue new debt to help pay for that.
Offering unlimited or steeply higher deposit-insurance limits in the U.S. would closely resemble what several European countries, including Germany, Denmark and Ireland, have done recently. Regulators would have discretion about whether to raise limits for just retail accounts or for corporate accounts as well. If they use the authority, it is expected to extend to all deposits, as the loss of large corporate accounts for banks can be devastating.
"Our European friends have done it, so there will be great pressure to follow," former Federal Deposit Insurance Corp. Chairman William Seidman said.
The FDIC has roughly $45 billion in its deposit-insurance fund to cover $5.2 trillion of insured U.S. deposits. Lifting the cap entirely would mean the FDIC would be guaranteeing the remaining $1.8 trillion of U.S. bank deposits. An element of the recently enacted bailout law gives the FDIC much broader authority to borrow money from the Treasury Department to backstop its fund if it became necessary.
A blanket guarantee on deposits could present risks apart from exposing the FDIC to enormous costs. Guaranteeing all bank liabilities without doing the same for money-market mutual funds or insurance companies could prompt customers to move money from one sector to another, seeking the best protection.
Yet not making such a move opens up the possibility that customers with large deposits in U.S. banks might withdraw their funds and move them overseas to jurisdictions that offer more insurance.
[..]
The possibility of removing the cap on deposit insurance was raised last week by Treasury Department officials who asked lawmakers to consider giving the FDIC broad discretion to determine the level of government insurance. Lawmakers instead opted to temporarily raise the existing $100,000 federal limit to $250,000, feeling that anything higher could threaten passage of the bailout package.
But the worsening condition of the banking sector has fueled discussions among government officials about whether they should be prepared to remove the limits entirely.
"I think that lifting the cap entirely is something that may have to be done, really, just in the next few weeks," said Camden Fine, chief executive officer of the Independent Community Bankers of America, a trade group.
Bank regulators believe the "systemic risk" clause in federal law gives them the authority to lift insurance limits, though it has never been used to do so before. "We believe that we have significant latitude, in consultation with Congress, under the systemic risk exception...to protect depositors and adopt other measures to support the banking system," FDIC spokesman Andrew Gray said.
Comptroller of the Currency John Dugan, one of the nation's top bank regulators, said he supported the increased limit of $250,000. He added that policy makers had the power to back all deposits if necessary. "That is an important tool," he said in an interview.
To remove the ceiling on deposit insurance, multiple government agencies would first need to agree that there was a "systemic risk" to the economy, thereby invoking a rarely used legal power. Amid repeated efforts by the federal government to prop up ailing institutions, some bank regulators say the move is justified.
It's not clear that either idea will become reality, and U.S. officials downplayed expectations of any announcement this weekend. But as the crisis deepens and stocks continue to tumble, pressure is building on the Bush administration to find a solution that goes beyond the $700 billion financial rescue plan recently signed into law. Having the government back bank lending would effectively entail the U.S. being the backstop for the country's financial system.
[..]
In the U.S., some $99 billion in just one type of bank debt is coming due between now and the end of the year. Hundreds of billions of dollars will need to be paid in the U.S. and Europe. Government backing would make it easier to issue new debt to help pay for that.
Offering unlimited or steeply higher deposit-insurance limits in the U.S. would closely resemble what several European countries, including Germany, Denmark and Ireland, have done recently. Regulators would have discretion about whether to raise limits for just retail accounts or for corporate accounts as well. If they use the authority, it is expected to extend to all deposits, as the loss of large corporate accounts for banks can be devastating.
"Our European friends have done it, so there will be great pressure to follow," former Federal Deposit Insurance Corp. Chairman William Seidman said.
The FDIC has roughly $45 billion in its deposit-insurance fund to cover $5.2 trillion of insured U.S. deposits. Lifting the cap entirely would mean the FDIC would be guaranteeing the remaining $1.8 trillion of U.S. bank deposits. An element of the recently enacted bailout law gives the FDIC much broader authority to borrow money from the Treasury Department to backstop its fund if it became necessary.
A blanket guarantee on deposits could present risks apart from exposing the FDIC to enormous costs. Guaranteeing all bank liabilities without doing the same for money-market mutual funds or insurance companies could prompt customers to move money from one sector to another, seeking the best protection.
Yet not making such a move opens up the possibility that customers with large deposits in U.S. banks might withdraw their funds and move them overseas to jurisdictions that offer more insurance.
[..]
The possibility of removing the cap on deposit insurance was raised last week by Treasury Department officials who asked lawmakers to consider giving the FDIC broad discretion to determine the level of government insurance. Lawmakers instead opted to temporarily raise the existing $100,000 federal limit to $250,000, feeling that anything higher could threaten passage of the bailout package.
But the worsening condition of the banking sector has fueled discussions among government officials about whether they should be prepared to remove the limits entirely.
"I think that lifting the cap entirely is something that may have to be done, really, just in the next few weeks," said Camden Fine, chief executive officer of the Independent Community Bankers of America, a trade group.
Bank regulators believe the "systemic risk" clause in federal law gives them the authority to lift insurance limits, though it has never been used to do so before. "We believe that we have significant latitude, in consultation with Congress, under the systemic risk exception...to protect depositors and adopt other measures to support the banking system," FDIC spokesman Andrew Gray said.
Comptroller of the Currency John Dugan, one of the nation's top bank regulators, said he supported the increased limit of $250,000. He added that policy makers had the power to back all deposits if necessary. "That is an important tool," he said in an interview.
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