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Bush administration calls for rise in deposit insurance

COMBINED NEWS SERVICES

October 1, 2008

WASHINGTON - The Bush administration moved to bolster confidence in U.S. financial markets yesterday, calling for a temporary rise in insurance on deposits in the nation's banks and relaxing a complicated accounting rule banks insist has been a big part of their problems.

The changes were rumored throughout the day, contributing to a rally on Wall Street also based partly on hopes Congress will try again later this week to pass a financial-system bailout. The rule changes were confirmed near the 4 p.m. close of trading on the New York Stock Exchange, sending share prices soaring and helping to gain back much of Monday's 777-point free fall.

The biggest potential change for consumers came from a statement by Federal Deposit Insurance Corp. Chairman Sheila Bair, supporting calls from both major presidential candidates to raise the limit temporarily on how much of a depositor's cash is subject to federal insurance.

Right now, deposits are insured up to $100,000 per account holder, regardless of how many accounts they hold in a given bank. Democrat Barack Obama and Republican John McCain both called for raising that threshold to $250,000 earlier yesterday as a way to help calm fear of a financial meltdown.

"Unfortunately, there is an increasing crisis of confidence that is feeding unnecessary fear in the marketplace. To address this crisis of confidence, I do believe that it would be helpful for the FDIC to have the temporary ability to raise deposit insurance limits," Bair said in a statement.

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 told Bloomberg News. The Treasury's recent step to guarantee all assets in money market mutual funds would leave banks at a competitive disadvantage, he 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, Fla. "This won't solve the problem. They're trying to do as little as possible to get the votes for a bad bill."

Congress must pass legislation before the FDIC can raise its bank account insurance amount.

Stock prices also rose on confirmation by the Securities and Exchange Commission that later this week it will review complex accounting rules that require banks to estimate the current value of toxic mortgage bonds that have been eroding their balance sheets.

The SEC issued guidance late yesterday on how banks should interpret existing rules, suggesting they have more flexibility than they've used. The SEC is under pressure to relax how banks report the mortgage bonds' value. Their hold-to-maturity value gets lost when banks must try to determine their fair-market value right now, when no one wants to buy them.

Banks and some Republicans have called for this accounting rule change to ease pressure on banks to hoard their capital instead of lending it out. But consumer advocates warn the inability to assess the bonds' value is at the heart of the U.S. housing-finance crisis.

"You don't suspend the very rules to keep the players honest at a time when they are most likely to provide misleading information," said Barbara Roper, director of investor protection for the Consumer Federation of America, a consumer-rights group.

Created in 1933 in response to the thousands of bank failures that occurred in the 1920s and early 1930s; it's also responsible for supervising certain savings banks and state-chartered banks that are not members of the Federal Reserve System.

When it first began, initial coverage was for $2,500. That increased to $5,000 in July 1934, $10,000 in 1950, $15,000 in 1966, $20,000 in 1969, $40,000 in 1974, and was last raised to $100,000 for individual accounts in 1980.

In April 2006, a law enabled a raise in coverage on certain retirement accounts at a bank or savings institution to $250,000, from $100,000.

What does the FDIC do?

The Federal Deposit Insurance Corp. stands behind deposits of as much as $100,000 per person, per bank - savings or checking account, certificate of deposit, or money market - and up to $250,000 for money in a variety of retirement accounts.

Which types of accounts are insured?

Individual accounts, joint accounts, retirement accounts and multiple trust accounts each get up to $100,000 in coverage. However, accounts under the same ownership structure are added together to determine coverage.

SOURCE: FDIC, Los Angeles Times