Possible bank deposit insurance increase presents competitive challenge to CUs
WASHINGTON - An increase in bank deposit insurance coverage and a passel of other regulatory relief measures may just be around the corner if recent regulatory relief initiatives by federal regulators and lawmakers seeking to merge the Bank and the Savings Association Insurance Funds are approved.
But with credit union spokespersons generally declining comment on the matter as premature, it is clear that a significant competitive inequity would exist between federally insured banks and credit unions should the banks get their sought-after $100,000 increase in coverage to $200,000 per account.
"If Congress does choose to examine this issue...," said one veteran CU observer, "then I think credit unions would engage in regards to that issue. I don't think they could stand by and allow the banks and thrifts to gain that competitive advantage without raising that issue."
"Once again, that's premature," the expert said, "and there's really no reason for credit unions to waste their political capital on that issue, if it's not going to become an issue."
The deposit insurance increase issue erupted on the scene when Federal Deposit Insurance Corporation (FDIC) Chairman Donna Tanou raised it-along with other insurance issues, such as premium restructuring-during a speech before an Independent Community Bankers of America (ICBA) convention in San Antonio, Texas March 7.
"Given the changes underway in our financial system," Tanou said, disclosing a sweeping FDIC review of its regulations, "where hundreds of billions of dollars can shift almost overnight, and where many Americans do their personal business on-line, a reexamination of deposit insurance has never been more timely...."
"Certainly, in terms of purchasing power, $100,000 isn't what it was in 1980 when the current level of coverage was set. Had the coverage limit been indexed to inflation, it would now be about $197,000. The twenty years since 1980 is the longest period in the history of the FDIC that we have gone without raising the coverage limit."
"We are inclined to think," Tanou continued, presenting an option that has not yet been formally proposed, "that raising the coverage limit to $200,000 may not substantially elevate the risk exposure of the funds, in part because depositors already have the ability to structure their accounts to achieve far higher coverage."
Admitting, however, that her agency currently was unable to predict the effects of such a change, Tanou added, "A survey of the industry would help in this area. Some questions we need to explore include: Will more dollars move from big banks to small banks, or vice versa? Will dollars simply cross the street from one small bank to another? Will there be a significant inflow of funds from outside the banking industry?
Reportedly, ICBA-member banks, which tend to be smaller community banks struggling to compete with larger, "megamerger" institutions, heartily endorse Tanou's notion. They feel that their larger competitors enjoy an already expanded-and unstated-deposit insurance advantage, in that the federal government would be reluctant to let them fail.
A $100,000 increase in bank deposit insurance, they believe, would level the proverbial "playing field" for them.
But Congress would have to approve any such increase.
"I'm not going to support raising them under any circumstances," Senate Banking Committee Chairman Phil Gramm (R-Texas) was reported by the American Banker to have said on the subject. "I think if anything $100,000 is too high. A certain degree of insurance is important for customer confidence. Beyond that you start taking people out of the natural process of paying attention to their business."
Contacted for their comment on the issue, both NCUA Board Chairman Norman D'Amours and Board member Dollar were noncommittal given congressional prerogatives in the matter.
"I have not seen a proposal. I have not heard a proposal. I would not give an opinion on such an idea until I've had time to study it and inform myself about it," responded NCUA Board Chairman Norman D'Amours on the subject. "And I don't think Donna (Tanou) even has necessarily taken a position on it. I think she has just raised it...as an idea, because of changes in the economy...and the eighteen year gap (since the last increase)...."
"This is a congressional issue," said NCUA Board member Dennis Dollar. "If the Congress chooses to address the issue, then we certainly would like to have input into their decision-making process.
"I would think that if they address the issue of raising deposit insurance levels for other financial institutions, they would be required to look at the levels on credit unions as well. So I would hope that we'd have the input at that particular stage."
"But I think it's quite premature to begin discussing that until Congress has come to grips with the issue and seems inclined to act."
NAFCU, too, had no position on the issue as yet, and comments from CUNA could not be obtained by presstime. -