Treasury official recommends ways to resolve SAIF's problems.

John D. Hanvke Jr., undersecretary of the Treasury for domestic finance, told members of the Senate Banking, Housing and Urban Affairs Committee that the failure of one or two large thrift institutions could exhaust the slender reserves of the Savings Association Insurance Fund (SAIF), leaving it insolvent. Hawke said that as of March 31, 1995, the SAIF held only $0.31 in reserves for each $100 in insured deposits. Compounding the reserve problem is the SAIF's "meager" income--45% of SAIF premiums are used to pay interest on the Financing Corporation (FICO) bonds issued to prop up a prior insurance fund.

Hawke said SAIF-insured deposits would continue to shrink because under the Federal Deposit Insurance Corporation's proposed premium schedule, SAIF premiums for the healthiest institutions would be "nearly six times as high as the competing Bank Insurance Fund's (BIF) premiums." He said institutions avoided the SAIF's high premiums by selling off loans and reducing their need for deposits, replacing them with nondeposit funding sources or switching deposits from the SAIF to the BIF. If this problem is not corrected, said Hawke, the SAIF's weaknesses could not only leave it insolvent but it also could leave FICO interest payments in default.

To resolve the SAIF's problems, Hawke proposed that "institutions with SAIF-insured deposits could pay a special assessment at a rate sufficient to increase the SAIF's reserves to $1.25 per $100 of deposits at the beginning of 1996."

Jean M. Joy, audit partner of Wolf & Company in Boston and member of the American Institute of CPAs savings institutions committee, told the Journal that "CPAs would have to determine how to account for this assessment. Depending on the terms, CPAs may set it up as a prepaid asset amortized over time, or it could be expensed when it is paid." Joy said this decision would eventually affect the CPAs' audit opinion. "The SAIF-insured institution may not have sufficient capital to continue as a going concern," said Joy. "If it does not meet regulatory capital requirements, the institution could be forced into receivership and ultimately fail or be purchased."

Other Treasury solutions

Hawke also proposed spreading FICO payments pro rata over all FDIC-insured institutions. "Spreading the FICO payments over a large deposit base would avoid the vicious circle of shrinkage, perverse incentives and record-high premium rates," he said. He also suggested merging the deposit insurance funds no later than the beginning of 1998. "A merger would provide the requisite asset and geographical diversification and would protect taxpayers from the possibility of another deposit insurance crisis."

Joy agreed that action should be taken. "Because the SAIF's deposit insurance premiums are so much higher than the BIF's, the SAIF will not be able to compete," said Joy. "There is no doubt that something has to be done to help she SAIF in the near term."

RELATED ARTICLE: SEC Tests New Profile Prospectus

In a continuing effort to make mutual fund prospectuses more user-friendly, the Securities and Exchange Commission's Division of Investment Management is allowing the mutual fund community to test the use of a "profile prospectus" for investors.

The profile prospectus will be used by eight mutual fund groups on an experimental basis. It is intended to provide a clear and concise summary of key information investors need to know about a mutual fund. Each one presents, in the same order, 11 critica points of information, including the fund's goals, investment strategies, risks, appropriateness, fees and expenses. It also contains a bar chart depicting the fund's total return for each of the last 10 calendar years.

Arthur Levitt, chairman of the SEC, said the profile prospectus was "an important step in the SEC's ongoing campaign to take the mystery out of the marketplace for public investors."