One of the latest offerings in reforming the shaky Federal Deposit Insurance fund is to limit deposit insurance to $100,000 per social security number. Put another way, the maximum insurance that a depositor could get no matter how many banks or bank accounts he or she use would be $100,000.

This proposal misses the real problem, which is the "too-big-to-fail" doctrine. Deposit insurance is not the reason for the current banking and savings and loan crisis, but if we attack deposit insurance it may actually trigger bank runs and bank failures, especially in smaller communities. The too-big-to-fail doctrine and limits on deposit insurance will cause depositors to flock to the security of large, big-city banks.This week The Meyers Report interviewed one such small-town banker, Duane Lillibridge, president of the Farmer's Savings Bank in Northwood, Ohio, on just how the new proposals would affect his bank and his community.

"The problem with FDIC insurance reserves has nothing to do with the $100,000 insurance levels as is currently allowed. Nor has it come from a lack of bank deposit insurance premiums," Lillibridge said. "What has put the insurance fund at risk is very simply the fact of the `too big to fail' doctrine."

"Look at the bailouts of the past when the administrators of the funds made whole 100 percent of the deposits in the large banks, such as Continental Illinois, National Bank of Washington and the Bank of New England. In these large institutions not only were all depositors made whole but also millions of dollars were fully paid off on foreign deposits which were not even insured and against which no insurance premiums were ever assessed."

What the fund administrators did, in effect, was give away free money. For example, if you took out a $100,000 life insurance policy and paid the premiums, you would expect the insurer to pay your beneficiary $100,000 when you die. However, how long would that insurance company stay in business if it decided to pay out $150,000, just because you had some extra expenses?

If the administrators of the deposit insurance fund pay on deposits in excess of the insured amounts and deposits that are not covered, the fund, quite naturally, is going to get into trouble.

"With the too-big-to-fail doctrine . . . they have literally asked the bankers of America to indemnify the whole world. Not only can the banks of America not afford it, our government can't either. It's insane," said Lillibridge.

The result would be a situation where the solution is worse than the problem.

If depositors know that they will be insured under the too-big-to-fail doctrine, a rush to the larger banks would leave the smaller ones depleted.

"Why would you keep your $100,000 maximum in a small bank when you can keep $500,000 in a large bank, knowing that the government won't let the bank fail," said Lillibridge. "As our deposits flow out to the big banks, our ability to lend to deserving small businesses diminishes in direct proportion to the outflow of capital."

Some bankers aren't worried about that possibility because they don't see the proposal passing in its current form.

"The current proposal doesn't allow for any flexibility," said Chris Chenoweth, executive director of the California Bankers Association. "If you limit the number of insured accounts depositors can have, you hurt everybody, consumers, small banks and large banks alike. That is, if the too big too-big-to-fail belief is eliminated.

"There will always be a place for small quality banks because they provide service the big banks can't," said Chenoweth. "It's not a matter of big vs. little. It's a matter of properly assessing deposits and insuring those deposits to recognized limits. Our stand is that all deposits should be assessed, including foreign ones."

Reader questions will be answered and may appear in this column, when mailed to Gary S. Meyers at 308 W. Erie, Suite 300, Chicago, IL 60610