Advisers Propose Bank Insurance Cuts

WASHINGTON--President Reagan's advisers yesterday recommended curtailing deposit insurance for bank and savings and loan accounts, triggering swift negative reaction from Congress and the Treasury Department.

In its final report to Reagan, the president's Council of Economic Advisers said reducing protection for depositors would encourage them to more closely "monitor the financial health" of the institutions holding their money.

But the Treasury Department, through Rep. Chalmers Wylie of Ohio, senior Republican on the House Banking Committee, promptly distanced itself from the latest proposal involving the troubled savings industry in which a post-Depression record of more than 200 insolvent institutions were closed last year.

At a hearing of the House committee, Wylie said, "Curtailing deposit insurance is not an option and will not be considered" as part of the S&L plan being developed by Treasury Secretary Nicholas F. Brady, who is staying on in the Bush administration.

Wylie, who said he spoke after his office conferred with the Treasury Department, said Brady will present the plan to President-elect Bush by about February 15.

Rep. Henry B. Gonzalez (D-Tex.), chairman of the committee, did say a gradual reduction in deposit insurance may be considered as part of solving the S&L crisis. But he also said such a proposal "is a very serious matter, not a matter to be thrown out as a trial balloon."

Other Democratic and Republican members of Congress reaffirmed a commitment to guaranteeing deposits up to the current $100,000 per account limit.

"Congress will stand foursquare behind the $100,000 agreement," said Rep. Charles Schumer (D-N.Y.), "I'm appalled at the timing of the administration...I think the public needs some reassurance."

In its report, released by the White House, the Council of Economic Advisers also sharply criticized Reagan-appointed savings and loan regulators for "postponing the day of reckoning" in their rescues of failed institutions.

"Most regulatory actions taken so far...will sharply increase costs to the general public," the report said. S&L regulators' practice of guaranteeing new owners of rescued S&Ls against losses for up to 10 years weakens the incentive to manage efficiently, it said.

The top regulator, M. Danny Wall, chairman of the Federal Home Loan Bank Board, defended his agency's year-end spate of savings and loan bailouts as cheaper than shutting down the failed institutions and paying off depositors.

Wall told the committee that his agency rescued 75 institutions in December at a cost of $15.5 billion to be spread out over 10 years. Tax benefits arising from the deals will cost the government an additional $4 billion.

Liquidating the S&Ls and shutting them down would have required $47 billion in "up-front cash," far more than is available immediately to the Federal Savings and Loan Insurance Corp., Wall said. However, by selling off the property of the failed S&Ls, regulators eventually would have recouped all but $22.8 billion on the December transactions, he said.