One dollar in 1980 equals nearly $2 today. That may seem like a simple premise, but it’s also part of the reason for one of several in-depth reforms being explored by the Federal Deposit Insurance Corp.

The FDIC recently issued a lengthy options paper detailing various proposals for reforms in the way bank deposits are insured throughout the country. Among the options explored in the 84-page missive is raising the insured amount from $100,000 to $200,000 per account to make up for inflation; the amount hasn’t been raised since 1980.

But a whole host of pros and cons accompany the simple idea of indexing the amount for inflation.

“The basic reason we’re raising the issue is that we’re thinking about the stability of the value of deposit insurance protection,” said Fred Carns, associate director of the division of insurance at the FDIC.

Congress has revisited the issue five times on an ad hoc basis since 1935, finally raising the amount from $40,000 to $100,000 in 1980. The 20 years from 1980 to the present are the longest the limit has remained the same.

“Is that the way we want to proceed going forward, or do we want more systematic indexing? That’s what we’re looking at,” Carns said, stressing that the FDIC is neither for nor against any proposal, but is still in the midst of weighing the options and gathering industry input and information.

“One benefit of a more systematic approach would be stability, the certainty of what the coverage is going to be, for planning purposes,” Carns continued. “But what people worry about any time we talk about this is the effect on risk-taking by institutions.”

The worry involves what the FDIC calls “moral hazard”: that with increased insurance coverage, insured institutions would have less incentive to behave in a safe and sound manner with the money entrusted to them. Many, including Senate Banking Committee Chairman Phil Gramm, Treasury Secretary Lawrence H. Summers and Federal Reserve Board Chairman Alan Greenspan, have loudly decried the idea of raising coverage, the latter two blaming the severity of the savings and loan crisis in the 1980s on the last increase – a point which Carns calls a “legitimate concern.”

But many in the industry maintain that it’s time for a change.

“One hundred thousand dollars is just not what it used to be,” said Karen Thomas, director of regulatory affairs for the Independent Community Bankers Association. Thomas pointed out that, in recent years, the banking community has been occupied with modernizing financial services, culminating with the passage of the Gramm-Leach-Bliley Act last year.

“Now it’s time to look at insurance reform, and the FDIC thinks so as well,” she said. A few bills are already pending in Congress to immediately address the problem of raising the coverage limit for inflation, Thomas said. Many in the banking industry are also pulling for a system where the coverage would be automatically increased for inflation, to the nearest $1,000, every three years.

“For our members, community banks feel like a lot of customers are reluctant to deposit more than $100,000, that they’re very mindful of the coverage limit,” Thomas added.

‘Regulatory Cost’
However, others point out that anyone can get around the $100,000 limit by simply placing money in different accounts under different family member names or in separate banks. And in Massachusetts, separate organizations provide excess insurance for savings, cooperatives and credit unions above the FDIC.

“In Massachusetts [raising the insured amount] is not as important an issue. Most banks in Massachusetts have excess deposit funds,” said Dan Forte of the Massachusetts Bankers Association. “But the concern a number of people have is that, if the FDIC is willing to look at an increase from $100,000 to $200,000, no one’s put a price tag on it yet. It could be very expensive.

“The last thing we want is to increase the regulatory cost to banks in Massachusetts.”

Since raising the insurance limit won’t make that much difference in Massachusetts, Forte said that MBA members are concerned about other areas the FDIC is investigating, including how the organization should price risk, how new deposits should be treated, and how losses should be funded.

The only recommendation presented in the options paper is merging the Bank Insurance Fund and the Savings Association Insurance Fund. Those in the banking industry, such as America’s Community Bankers, have shown support for the idea of merging the funds. The MBA, too, would support the notion of combining the funds, said Forte.

“A more diversified pool is safer for everyone involved,” Forte said.

Another issue Massachusetts bankers are interested in is rebates to banks that don’t need excess funds. Legislation dealing with this issue is being supported by the MBA, Forte said. But the biggest concern of local bankers has to do with keeping the capitalized fund at a sufficient level, he added.

In terms of pricing, in these good economic times banks are paying small premiums, but have the potential of paying heavy premiums when bad times hit. According to a recent press statement by FDIC Chairman Donna Tanoue, if the economy were to suddenly experience a downturn, banks could find themselves paying 23 cents for every $100 of insured deposits they hold, as they paid in the early 1990s. Such a premium, she said, would drain almost $9 billion from insured banks and thrifts, and could lead to a $65 billion contraction in lending.

Also, according to both Thomas and Carns, banks that are growing rapidly are paying no deposit insurance premiums, which could be a drain on the system. Tanoue pointed to issues of fairness, noting that currently one bank presenting less risk to the Bank Insurance Fund pays the same premium as an institution presenting higher risk.

“If the FDIC had more flexibility, possibly the safest institutions would pay less in the long run,” said Carns.

“The goal is to have a process that leads us to policy recommendations for the board to consider early next year,” Carns added. The FDIC is seeking public comment on the options paper, which is available on the FDIC Web site, www.fdic.gov, and just recently posted an accompanying questionnaire. A hard copy will soon be sent to every insured institution.

“We do have some comments flowing in here. I’m surprised at the activity thus far,” said Carns. “Clearly there are pros and cons, costs and benefits. The question is how do we weigh these and what kind of analysis do we do to weigh these issues.”