Small Bank Depositors Need Reassurance, Too

The Federal Deposit Insurance Corp. and Chairman L. William Seidman are to be congratulated for moving decisively to forestall a panic in the wake of a run on banks owned by Bank of New England Corp., the third largest bank-holding company in the region. The decision to make good accounts over $100,000 not only prevented the loss of $2 billion in deposits, but it also averted massive shifts of deposits between banks because depositors would have scrambled to reduce the amount in their accounts below the limit. Excessive money flows are a no-no in an already strained banking system. We are in recession. By reassuring depositors throughout the rest of the country that the federal government intends to make their deposits whole beyond the $100,000 that it is obliged to cover in case of a bank failure, the FDIC has struck precisely the right note of reassurance.

But there is a problem. The law allows the FDIC to cover over-the-limit deposits only when such protection is "essential" to the U. S. financial system or to the bank's local economy. In practice, that means failing big banks get full insurance of every nickel on deposit. But what about the millions of Americans who have their money in little banks? Anything they have on deposit in excess of $100,000 won't be insured by Uncle Sam. Some are already starting to pare down their accounts and move the uninsured surplus to other banks, many of them to larger banks.

BUSINESS WEEK has long called for a reduction of federal deposit insurance because it has led to imprudent investments by bank management, notably in the savings and loan debacle. We still believe that Congress should act swiftly to reduce the amount of federal deposit insurance. But until Congress sets a timetable for a new deposit-insurance code, neither corporations nor small banks--nor the U. S. economy as a whole--should be asked to pay a price for vagaries in administration of the existing law. The economy is in trouble, and the banking system is frail. For now, unlimited federal deposit insurance should be extended to deposits at all federal banks, not just the big ones. The paramount goal now is to reestablish confidence.