WASHINGTON (MktNews) - Federal Reserve Board Chairman Alan Greenspan said Wednesday the Fed continues to oppose efforts to increase the current deposit insurance ceiling beyond the $100,000 level, although it supports FDIC reforms.
"Neither financial stability, nor depositors, nor depositories are being disadvantaged by the current ceiling," Greenspan said in testimony before the Senate Banking Committee. Peter Fisher, Treasury under secretary for Domestic Finance, joined Greenspan at the hearing and repeated the administration's position supporting FDIC reform to make it more flexible, and to merge bank and thrift insurance, but opposing an increase in the insurance limit. Greenspan said raising the ceiling would have the effect of extending the government's safety net, increasing the government subsidy to depository institutions, expanding moral hazard and reducing the incentive for market discipline without providing any tangible public benefit. "With no clear public benefit to increasing deposit insurance the board sees no reason to increase the scope of the safety net," he said.
The U.S. financial system is now "exceptionally responsive" to the challenges of economic change, Greenspan said, adding that "structural distortions induced by government guarantees have risen." "We have no way of ascertaining at exactly what point subsidies provoke systemic risk. Nonetheless, prudence suggests that we be exceptionally deliberate when expanding government financial guarantees," he said. In his prepared testimony, Greenspan made no comment on the U.S. economy or on any current fiscal or monetary policy issues. He confined his remarks to the subject of the hearing, which is the status of the Federal Deposit Insurance system. He said the Fed continues to endorse a package of reforms suggested by the FDIC in 2001 except for their suggestion to introduce inflation indexing of the current $100,000 deposit insurance ceiling. He added that the current ceiling "appears more than adequate to achieve the positive benefits of deposit insurance" even if its real value were to erode further.
In his prepared remarks, Fisher said, "The administration strongly supports reforms to our deposit insurance system that would, first merge the bank and thrift insurance funds." However, he said, "The administration strongly opposes any increases in deposit insurance coverage limits," noting that such a move would not solve the problems facing the FDIC and "would serve no sound public policy purpose." But in expressing support for reforms, Fisher said, "I am concerned today that our deposit insurance system has structural weaknesses that, in the absence of reform, could deepen over time."
He stressed that "there is no crisis in the FDIC," since it is well managed and has adequate reserves, but said this is the right time to implement reforms. Referring to the call for an increase in deposit insurance, Fisher urged Congress to "avoid such an unneeded and counterproductive diversion from real and necessary reform." //www.marketnews.com