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One Bank Down. Time to Bolster the FDIC?

Shades of the savings and loan crisis: One big bank failure, and suddenly the "FDIC Insured" sticker is front and center on the TV news--and on Capitol Hill. As Congress investigates the $500 million meltdown of Superior Bank in Hinsdale, Ill., the collapse is reviving an effort to overhaul deposit insurance, the system that protects small customers when a bank or thrift goes bust. The biggest winners could be retirement savers, whose insurance protection could triple from the current $100,000--but only if fractious bankers can get together on a host of technical issues.

There's plenty of reason for the major players to cut some deals. Superior's cost could drag the thrifts' insurance fund below 1.4% of deposits. That's still above the 1.25% floor mandated by law--but with banks and thrifts facing a shaky economy and inflated home values, lawmakers fear more damage to the funds. Superior is "a timely reminder of the potential exposure," warns Senate Banking Committee Chairman Paul S. Sarbanes (D-Md.), who plans mid-September hearings to probe bank regulators' squabbling over the thrift's woes.

LOOK OUT BELOW. For banks, the issue isn't whether to reform deposit insurance, but who will pay. Under FDIC overhauls passed in 1996, well-run, well-capitalized institutions don't have to pay premiums as long as the funds are flush. But if either the bank or thrift fund dips below the 1.25% floor, institutions fall off a "cliff." Annual premiums would shoot up to $230 for every $100,000 of insured deposits. "In bad times, when they can least afford it, banks could be hit with daunting premiums," says Senator Tim Johnson (D-S.D.), chairman of the Banking Subcommittee on Financial Institutions. The charges "could dry up lending in an economy that's already in trouble," warns Diane M. Casey, president of America's Community Bankers, the thrifts' trade group.

Banks, the FDIC, the Treasury Dept., and Federal Reserve Chairman Alan Greenspan all agree that the cliff is a problem--but that's not enough to guarantee action. Last spring, the FDIC proposed that all banks pay small premiums every year, with rebates to low-risk banks. But banks are fighting across-the-board premiums because they paid huge sums to replenish the funds in the mid-'90s. "We're not going to pay for a new car just to get a tune-up," says Edward L. Yingling, chief lobbyist for the American Bankers Assn.

Reform could also founder on small banks' push to boost the $100,000-per-depositor insurance ceiling. Independent banks--mostly rural institutions that depend heavily on deposits--argue that the ceiling, last raised in 1980, should be doubled to catch up with inflation. But many economists, including Greenspan, blame the 1980 increase for the go-go lending that led to the S&L crisis. Higher insurance limits would also require a bigger fund and more premiums--so big banks oppose the move.

A possible compromise is emerging: Boost the ceiling for individual retirement accounts and index everyone else's insurance to inflation. America's Community Bankers proposes at least $300,000 in protection for IRAs. Given Congress' backing for IRAs in last spring's tax cut, a deal to raise the ceiling for retirement funds could give FDIC reform a push.

By late September, incoming FDIC Chairman Donald E. Powell is expected to lay out his agency's new strategy for reform. He'll face a daunting challenge. Financial legislation seldom moves without extraordinary unity among bankers--or a crisis. So far, bankers haven't agreed on enough of the details to smooth the path for FDIC reform. But Superior's failure is a warning that, even when the insurance funds are healthy, trouble lurks just around the corner. That may give Congress all the inspiration it needs to act. With Senator Jesse A. Helms (R-N.C.) retiring, the GOP is reaching past North Carolina's Old Guard conservatives to embrace a more moderate candidate. Look for party leaders to anoint Elizabeth "Liddy" Dole, a Presidential contender and two-time Cabinet member, to run in 2002. Dole's popularity has riled conservative former Senator Lauch Faircloth, who is threatening a primary battle. But in an Aug. 8 poll, Dole takes 50% of the vote, vs. 23% for Democrat Elaine F. Marshall. In a similar matchup, it's Faircloth 36%, Marshall 32%. The incredible shrinking budget surplus is dashing hopes for corporate tax cuts. So U.S.-based multinationals are counting on an Aug. 20 ruling from the World Trade Organization to bolster their case for a big new break. A WTO appeals panel confirmed that the U.S. tax code contains an illegal $4 billion subsidy for U.S. exporters. U.S. companies plan to argue that to compensate for its repeal, they would need a more lucrative exemption on foreign-sourced income from affiliates abroad. And you thought $600 for a hammer was expensive. A $6.2 million Pentagon pilot program to encourage Internet voting by soldiers overseas delivered only 84 votes last November. That's $73,810 per ballot, reports the Center for Public Integrity, a watchdog group. Pentagon brass blame the cost of new technology and insist the program was designed to deliver just 250 votes anyway.

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