Will increase in deposit insurance help?

If the Senate passes a financial bailout bill that increases the amount of insurance on bank accounts, will it:

A) Have almost no effect?

B) Reassure depositors, especially small businesses?

C) Allow banks to compete more easily with money market accounts?

D) Increase the opportunity for banks to take risks with depositors' money without worrying about whether it will be paid back?

Any of those answers, or some combination of them, could be right, said financial-industry experts, small-business owners, and bankers.

The Senate was expected to approve this evening legislation that would increase the limit on insured deposits from $100,000 to $250,000. The amount would revert to $100,000 at the end of 2009 unless extended.

The proposal, which is viewed as helping Main Street instead of Wall Street, is aimed in part at appeasing Republicans who have resisted bailout legislation.

For decades, the banking industry has watched as customers withdrew funds from banks and put them into newer products such as money market funds offered by investment firms. Consumers viewed these funds as safe - until the recent turmoil - even though they lacked insurance.

Concern about the security of money market funds led the Treasury Department to say recently that it would insure them, too, up to a total of $50 billion for the next year. That helped the banking industry argue that the federal government should raise limits on deposit insurance.

"They have effectively guaranteed money market funds with no limit. If that stands, that will suck deposits out of the banking system," said Commerce Bancorp Inc. founder Vernon Hill.

Banks need a strong flow of deposits to make the loans that keep the economy moving, he added.

Several owners of small to medium-size businesses said uncertainty about the banking industry's health had left them considering whether to spread their accounts out.

"We've been having that internal discussion, whether we need to start moving cash around to different banks," said John Reitano, president of Capogiro Gelato Artisans. But he wondered: "If you're promising $250,000, is there even going to be enough money to cover it?"

Cary Borish, a partner in the Marathon Grill restaurants, said he thought the proposal would reassure anxious depositors like him.

"I think anything the government can do at this time to make us feel more comfortable in the banking system can help."

Peter Smith, a managing member of the Jenkintown law firm Semanoff, Ormsby, Greenberg & Torchia L.L.C., said his company had considered that, too.

"As a small business, we regularly have more than $100,000 of cash in our account, and as stories circulated about bank problems, we looked at how to address that," Smith said. "Unfortunately, there really aren't any solutions, except for opening accounts at different banks."

But some finance experts say they think the proposal would do little.

Mark Flannery, a University of Florida finance professor, said his research showed that raising the limit to $250,000 would not affect many depositors. People and businesses with more than $100,000 already generally have opened multiple accounts to get extra insurance, he said.

"It's probably a very good psychological thing," Flannery said, "but I don't think it's going to have a very important effect."

Boston College finance professor Ed Kane said he believed the proposal would only reduce discipline in a market already operating with too little.

"I think it's horrible," Kane said. Increasing limits only encourages banks to take more risks, because they know the Federal Deposit Insurance Corp. will rescue depositors. Providing clear information about the health of banks would be a better way to make depositors feel secure and reduce risk, he said.

"I feel they're adding ornaments to this bad bill, rather than improving the guts of it," he said.

He blamed President Bush for scaring people into voting for the legislation and said the economy was not as bad as leaders pushing for the bailout have said.