'Treat all bank failures equally' says former FDIC chief.

• Author: Raab, Marian
• Position: BANKING - United States. Federal Deposit Insurance Corp.

Should all bank failures be treated equally? That's what William M. Isaac, the former chairman of the Federal Deposit Insurance Corp., proposes.

Isaac, who chaired the commission between 1981 and 1985, says the FDIC should use its emergency powers to declare that it will handle all bank failures in a way that will protect all the bank's general creditors--with an exception for fraud--during the current economic crisis.

He is not a big fan of the current plan, which raised the deposit insurance limit to $250,000, for one year.

"I think the plan that the FDIC has offered up is better than where we were," he says. "But it's far too complex and not broad enough."

Isaac, who now runs Washington, D.C., consulting firm Secura Group LLC, a LECG company, argues that increasing the deposit insurance limit is unfair to small banks because they will disproportionately pay for the new insurance system. He also predicts that Congress will never let the deadline expire.

"If I'm correct, then we will have permanently increased the cost of deposit insurance," he notes. "Because small banks rely more heavily on insured deposits than large ones, small banks bear a disproportionate share of the cost."

After increasing the insurance limit to $250,000 proved inadequate, the FDIC announced that it would fully insure checking accounts that don't bear interest for one year, too.

But that program is likely to confuse...