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Shrinking Thrift Insurance Fund May Face Crunch, Gao Warns

The savings and loan industry’s deposit insurance fund is dwindling and may be insufficient to handle a large failure, a government report said Thursday.

The insurance fund’s inadequacies will worsen unless Congress and regulators address a widening gap between the bank and thrift deposit insurance funds, said the report from the General Accounting Office, the investigating arm of Congress.

Senate Banking Chairman Alfonse M. D’Amato and Rep. John J. LaFalce, D-N.Y., who released the GAO report, both expressed alarm with the findings. They urged colleagues to act before a repeat of the thrift crisis, a reference to the 1980s spree of thrift collapses that cost American taxpayers $150 billion.

“I don’t mean to create a panic, but this is a situation that calls for us to act prudently and expeditiously, to avoid what otherwise would be a very serious hit, a meltdown,” D’Amato said.

“Taking no action is not an option,” LaFalce said. “Our goal must be to avoid any use of taxpayer funds now or in the future, and to achieve that goal we must act.”

The two lawmakers last year asked the GAO to analyze the growing disparity between the Bank Insurance Fund, or BIF, and a similar fund for the S&L; industry, the Savings Association Insurance Fund, or SAIF.

The banking industry fund is healthy, with $21.8 billion in reserves at the end of 1994, and will meet its funding goals sometime this year. As a result, the Federal Deposit Insurance Corp. plans to sharply cut the fees banks pay into the fund.

LaFalce said that fee reduction will give bankers a competitive advantage over the thrift industry. Thrift insurance premiums could be as much as five times greater than bank premiums, the GAO said.

Not only will S&Ls; have to pay higher deposit insurance fees, they’re still saddled with repayment of $8.2 billion of bonds, known as Financing Corp. or “FICO” bonds, that were issued in the 1980s to rejuvenate the ailing thrift fund.

Some big thrifts see the disparity as so substantial, they’re essentially bailing out of the industry and applying for bank charters.

On Wednesday, Great Western Financial Corp., the nation’s second-largest thrift, said it plans to become a commercial bank because of the cheaper bank deposit insurance premiums.

“That is making the situation worse and worse,” LaFalce said.

Great Western’s plan, if successful, only further shrinks the base of the thrift industry to contribute to the thrift fund, leaving less healthy firms behind to bear the burden, LaFalce said. The deposit base for the SAIF has declined by 25 percent since 1989, the GAO said.

The bank insurance fund currently has about $1.16 on reserve for each $1 of insured deposits, but the thrift fund has just 27 cents for each $1 of insured deposits, or a total of $1.9 billion.

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