Federal Reserve Chairman Alan Greenspan said Thursday policy-makers should proceed with caution as they explore overhauling a decades-old system that insures deposits in banks and thrifts.
The Federal Deposit Insurance Corp. has proposed some changes to the system, which was established in 1933 during the Depression.
The FDIC last month recommended to Congress that all banks pay for deposit insurance according to their risk of failure, and proposed that the US$100,000 limit on account coverage be pegged to inflation.
The insurance system and other federal programs that aim to keep banks safe are often referred to as the “safety net.” Any changes to this safety net, Greenspan said, must be balanced against potential costs.
“I believe this means being very cautious about purposefully or inadvertently extending the scope and reach of the safety net,” Greenspan said in a speech to a banking conference in Chicago.
Copies of his speech, which did not touch on interest-rate policy or the state of the economy, were distributed in Washington.
The central bank has slashed interest rates four times this year, totaling 2 percentage points, in an effort to shore up economic growth. Fed policy-makers meet Tuesday and many analysts are expecting a fifth rate cut, possibly by another half-point.
The FDIC wants to end what it sees as a free ride for more than 900 banks and thrifts that get the benefit of the insurance funds without ever paying premiums.
Current law prohibits the FDIC from collecting premiums from most institutions that have adequate capital and receive strong ratings from examiners. The FDIC wants to replace that with a system in which every bank and thrift would chip in, with insurance premiums based on risk.
If funds fell below a certain level, premiums gradually would be increased. If they grew above the level, banks and thrifts would receive rebates.
Greenspan said federal programs aimed at keeping banks sound shouldn’t lull people into a false sense of security about risks when they make a deposit and that bank creditors shouldn’t think that some financial institutions are too big to fail.
“Insured depositors are simply indifferent, and other creditors too often less sensitive than they would be at other entities to the risk taken by the bank because of both the reality and the perception of their own protection by the government,” Greenspan said.