Now that the dust is beginning to settle a bit on the massive savings and loan bailout, a related issue is being raised in Congress. Is the $100,000 federal deposit insurance on each savings account too high? Can it safely be lowered to a smaller amount to everyone's benefit?
The answers would seem to be yes.Part of the S&L problem has been that institutions could make all kinds of shaky investments and attract big depositors with promises of high interest payments, assuring them that if things went wrong, the federal government would step in and rescue the depositors.
Deposit insurance is a fine idea that grew out of people losing their life savings in Great Depression bank failures. For many years, it stood at $10,000 per account, enough to cover most people.
But the figure was upped to $20,000 in the 1960s, doubled to $40,000 in 1974 and soared to $100,000 per account in 1980. What began as a safety net to protect the savings for the low- and middle-income people, had ballooned into coverage for the high rollers as well. And therein came some of the S&L problems.
While taxpayer funds will rescue the failing S&Ls and rates paid by banks and S&Ls were raised to cover more of the insurance fund and boost reserves, the system is still vulnerable to economic disaster.
Some members of Congress and some bankers are suggesting that the deposit insurance be lowered, although most talk refers only to "several thousand dollars" per account. Few specific figures are being given. One proposal from the banking community would fully insure only the first $25,000 in an account. However, that appears to be too low.
In addition, lawmakers are considering the idea of limiting the number of insured accounts per depositor.
Lowering the insurance has several advantages. It would reduce slightly the potential drain on the FDIC. More importantly, it would make financial institutions more careful about what they do with depositors' money if only a portion of that money was federally insured.
A study on the future of deposit insurance is being done by the federal government, and some solid recommendations are expected when that report is issued in 18 months.
But even now, it seems to make sense to limit deposit insurance coverage to something less than $100,000 - and still protect most of the people in the United States who have savings accounts.