Little Known Deposit Insurance Fund Stirs Debate in Indiana

by Matthew Glans on December 30, 2010

A tight budget has lead Indiana lawmakers and Governor Mitch Daniels to look for new sources of revenue to fill their budget gap. One source now being considered is the the Public Deposit Insurance Fund, Indiana’s state-based backup to the Federal Deposit Insurance Corporation. This fund which has served its purpose well for more than 70 years, currently holds about $250 million in reserve.

Governor Daniels argues that the fund has outlived its original purpose.

From the Chicago Tribune:

But now that new state regulations provide another form of backup insurance, Daniels has said that tapping the fund for other state expenses is “a perfectly appropriate suggestion.”

“That fund has outlived its usefulness, and we do have needs in other areas,” Daniels said recently. “It would be perfectly legitimate to consider applying that money to other uses such as education or something else more current.”

The primary opponents to this fund raid are from the banking industry, who argue that it is irresponsible to tap this fund during a time when banks are failing at an alarming rate nationwide.

But any attempt to dip into the fund will face resistance from the state’s banking industry. Indiana financial institutions contend that the money — which accumulated from fees paid by banks, plus interest — belongs to them, not the state.

They also say that even after a new form of collateral-based insurance goes into effect next year, it’s risky to do away with the backstop and possibly put public funds at risk at a time of financial instability.

S. Joe DeHaven, CEO of the Indiana Bankers Association, said he believes “the reasons for the fund are just as important today as they were in 1937″ when the PDIF launched during the Great Depression.

“This would be one of the worst times to make the argument to take this (money),” he said.

These efforts by some Indiana lawmakers to raid this fund are misguided. The state collected money in the PDIF for the specific purpose of insuring bank deposits; the monies raised should not be rerouted to pay other debts. The banking industries’ arguments ring true, the financial industry as a whole is still in recovery. The PDIF still has a role to play and now is not the time for a fund raid.

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