Greenspan Nixes More FDIC Coverage

Wednesday, June 21st 2000, 12:00 am
By: News On 6

WASHINGTON (AP) — Federal Reserve Chairman Alan Greenspan and the Clinton administration voiced opposition Wednesday to a proposal to double the limit on bank deposit insurance to $200,000. Such a step would give ``increased subsidies to upper-income individuals,'' Greenspan said.

Greenspan and Treasury Secretary Lawrence Summers were asked their views on the proposal by Donna Tanoue, head of the Federal Deposit Insurance Corp.

The question, from Senate Banking Committee Chairman Phil Gramm, R-Texas, came as they were testifying in support of unrelated legislation to modernize regulation of the nation's futures markets.

Backers of the deposit insurance proposal, including major groups representing banks, say it is needed to take account of inflation since the limit was raised to $100,000 per account in 1980.

A doubling of that limit ``would be a major policy mistake,'' Greenspan said at the joint hearing of the Senate Agriculture Committee and the Senate Banking Committee.

Summers said such an increase would be ``a serious public policy error'' that could create risk for the financial system.

Greenspan and Summers expressed support for legislation to overhaul futures market regulation. The bill was introduced earlier this month by Sen. Richard Lugar, R-Ind., the Agriculture Committee chairman.

Both Greenspan and Summers said Lugar's plan would provide investors with the necessary protection without stifling innovation in the fast-changing futures and derivatives markets.

``If our derivatives markets are to remain innovative and competitive internationally, they need legal and regulatory certainty that only legislation can provide,'' Greenspan told the two committees.

Summers urged Congress to move quickly.

``In the absence of an updated legal and regulatory environment, needless systemic risk might jeopardize the broader vitality of the American capital markets,'' Summers said.

``We also risk an erosion of competitiveness of American financial markets, with an increasing amount of business moving offshore to jurisdictions where the framework has kept up with the pace of change,'' Summers said.

Both officials expressed some reservations about certain technical aspects of the legislation but said overall it adopts the proper approach.

The legislation would reauthorize the operations of the Commodity Futures Trading Commission, which regulates futures markets where trading is done in contracts for the delivery at a future date of a wide range of assets, from wheat and soybeans to financial instruments.

Greenspan and Summers agreed that the $80 trillion market in over-the-counter derivatives — which are traded privately — should continue to be exempt from regulation, as per a 1998 White House recommendation.

Derivatives are complex financial instruments whose value depends on the value or change in value of an underlying security, commodity or asset. Businesses buy them to guard against losses from unexpected market movements. Speculators buy them as high-risk bets, hoping for huge returns.