FDIC Seeks Authority to Raise Deposit Insurance Limit (Update3)

Sept. 30 (Bloomberg) — Federal Deposit Insurance Corp. Chairman Sheila Bair is seeking authority to temporarily raise deposit insurance limits from $100,000, giving banks liquidity amid a “crisis of confidence” in the banking industry.

“I do believe that it would be helpful for the FDIC to have the temporary ability to raise deposit insurance limits,” Bair said today in a statement in Washington. She has discussed proposals with congressional leaders revising a $700 billion bank rescue after the House defeated the plan this week.

Bair didn’t specify a size of the increase and said boosting coverage would give banks added liquidity and reassure depositors. The FDIC in 2000 considered doubling the coverage. The Federal Reserve and Treasury at the time opposed the increase, and the measure failed to pass Congress.

An increase in coverage to as much as $250,000 would be insufficient to protect small- and mid-sized companies, former FDIC Chairman William Isaac said in an interview. The Treasury’s recent step to guarantee all assets in money market mutual funds would leave banks at a competitive disadvantage, Isaac said.

“They are trying to propose increasing the deposit insurance limit to buy a few votes,” said Isaac, who runs bank consulting firm Secura Group in Sarasota, Florida. “This won’t solve the problem. They’re trying to do as little as possible to get the votes for a bad bill.”

Treasury Secretary Henry Paulson, on a conference call with bankers, said today raising coverage for the first time since 1980 is “an option that’s potentially on the table,” said Robert Davis, executive vice president of the American Bankers Association, which organized the call to brief grassroots organizers on strategies to resurrect Paulson’s bailout plan.

Paulson

“He acknowledged that it was one of the issues in Washington that’s being discussed,” said Davis, who was on the call. He said Paulson didn’t express an opinion and wouldn’t elaborate on specific proposals. “He wasn’t prepared to discuss any legislation or how it might change,” he said.

The Washington-based agency also may seek to increase the $250,000 insurance limit on Individual Retirement Accounts. “That would be up to Congress to decide how it may break down in different categories,” FDIC spokesman Andrew Gray said.

Bankers oppose a permanent increase in coverage that would be funded by industry assessments, although support for a one- year bump is gaining momentum in Congress, ABA President Edward Yingling said. The group hasn’t settled on the size of an increase or which assets should be covered, he said.

`Collateral Issues’

“There are lot’s of collateral issues to raising deposit insurance and we would not want to permanently up it in four days,” Yingling said in an interview. “This is not taxpayer money; it’s bank premiums. We would want to have with the Congress a careful analysis before anything is done permanently.”

New Hampshire Senator Judd Gregg, the chief negotiator for Republicans on the rescue bill, said he was willing to consider proposals to expand the FDIC’s role as well as raising the size of bank accounts the agency insures to $250,000. Barack Obama, the Democratic presidential nominee, and John McCain, the Republican nominee, also back raising the level to $250,000.

Senate Banking Committee Chairman Christopher Dodd said he’s spoken with Bair about expanding the FDIC’s authority “on a temporary basis.”

“We’re certainly going to look at that,” Dodd said today on Capitol Hill. “That isn’t modifying the plan we have; that would be adding to it.”

Small Businesses

Representative Carolyn Maloney, a New York Democrat, said small businesses in her district would support higher limits on deposit insurance. “Many of them are opening up numerous accounts for FDIC insurance,” Maloney said. “It is difficult to conduct business that way.”

House Republicans have proposed expanding the FDIC’s authority to handle more troubled institutions. They’re also exploring plans to revive a 1980s-era program that would let the FDIC issue certificates to banks that could be used as capital and would be repaid with interest. Isaac, who ran the FDIC from ’81 to ’85, said the agency can use its existing powers to protect general creditors in the event of a bank failure like he said the FDIC did for Wachovia creditors this week.

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