Roanoke Times
Copyright (c) 1995, Landmark Communications, Inc.
DATE: THURSDAY, July 12, 1990 TAG: 9007120445
SECTION: BUSINESS PAGE: C-5 EDITION: EVENING
SOURCE: Associated Press
DATELINE: WASHINGTON LENGTH: Medium
Greenspan, in testimony prepared for the Senate Banking Committee, did not flatly oppose a reduction, but he warned that lowering the limit would involve "significant transition costs."
Greenspan acknowledged the need for change in the wake of the S&L crisis. The federal deposit insurance allowed thrift owners to gamble on investments, knowing they would reap the profits if they succeeded but taxpayers would pick up most of the loss if they failed.
If Congress lowers the current $100,000-per-deposit insurance limit, the Federal Reserve recommends "a meaningful transition period," he said.
Reducing the limit likely would cause the price of bank and thrift stocks to drop because it would cost institutions more to raise deposits in smaller chunks, Greenspan said.
The existence of deposit insurance and the resulting confidence in the banking system have "been the major reason why the United States has not suffered a financial panic or systemic bank run in the last half-century," the chairman said.
"Reform is required. So is caution," he added.
The most promising approach would be to force bank and S&L owners to risk more of their own capital, he said, and to improve supervision of institutions to make sure they use sound practices and are closed promptly when they weaken.
More capital is needed particularly if, as the board advocates, banks are allowed to engage in activities traditionally forbidden to them, such as securities underwriting, he said.
Today's Banking Committee hearing is one of a series intended to lay the groundwork for next year's debate on an overhaul of the financial and banking system.
Greenspan's views generally carry great weight with members of Congress. The Bush administration is expected to make its own recommendations in a report late this year.
The 1980 decision by Congress and the Carter administration to increase deposit insurance from $40,000 per account to $100,000 is often cited as one of the root causes of the savings and loan crisis.
Advocates of cutting the limit include conservatives who oppose government intervention in the economy and populists who believe the $100,000 deposit insurance limit protects rich people.
"If we were starting from scratch, the board believes it would be difficult to make the case that deposit insurance coverage should be as high as the current $100,000 level," Greenspan said.
"However," he added, "it is one thing initially to offer and then maintain a smaller degree of insurance coverage, and quite another to reimpose on the existing system a lower level of insurance, with its associated readjustment and unwinding costs."
The central bank chairman also said Congress should exercise care in increasing risks to uninsured deposits over the $100,000 limit. Although depositors stand to lose amounts over $100,000, regulators fearing a ripple effect have been reluctant to fail large banks and consequently all depositors in those institutions have been protected.
by CNB