NCUA may study feasibility of raising deposit insurance

WASHINGTON - Thus far the lion's share of the discussion about raising deposit insurance from $100,000 to $200,000 has occurred in the banking sector, however a little known bill has been introduced by a House member that would require NCUA to study the issue. Representative Charles Gonzalez (D-Texas) introduced H.R. 4603, the Deposit Insurance Increase Feasibility Act of 2000, on June 8, 2000. The bill would require the four federal banking agencies to do a joint study on the feasibility of increasing deposit insurance from $100,000 to $200,000; and the benefits and risks of such an increase on consumers, banks and the two bank insurance funds. The second part of the bill requires NCUA to do its own study on upping deposit insurance to $200,000 and to determine the risks on consumers, credit unions, the National Credit Union Share Insurance Fund and the Central Liquidity Facility. The bill calls for NCUA to complete the study six months from the bill's enactment date. CUNA is supporting the legislation. "We don't yet support the raising of the deposit insurance to $200,000, but we support doing a study on the issue. I think that reflects the genuine feeling of our government affairs committee that this is a complicated, multi-faceted issue," said John McKechnie, CUNA's vice president of legislative affairs. McKechnie said CUNA was pleased that Gonzalez's bill calls for the credit union study to be separate from the banking study. "That's in recognition that the NCUSIF is so unique from other federal deposit insurance programs," said McKechnie. The NCUSIF is different from the bank funds most notably in that it requires credit unions to contribute 1% of their insured deposits to the fund, while banks have a premium-based system based on risk. Bob Loftus, NCUA's Director of legislative and political affairs, said NCUA welcomes the bill and that NCUA even helped Gonzalez in the drafting of the bill. "We're following what's going on in the Hill. We are going to carefully ensure that credit unions are included if the limit is raised for the banks. However, I don't see that happening in the near future," said Loftus. Loftus said that the NCUSIF is in such great shape that if the limit was raised it would not necessarily cost credit unions any more money. "NAFCU's position is we'd like to keep insurance levels where they are now. If the levels were increased for the other players, we want the credit union insurance increased as well," said NAFCU's director of legislative and political affairs, Murray Chanow. There have been some bi-partisan bills already introduced in Congress that would raise deposit insurance to $200,000 in the banking sector. Just recently, however, some heavy hitters in the financial sector have come out strongly against raising banks' deposit insurance. Treasury Secretary Lawrence Summers said raising deposit insurance would weaken the underlying support of the financial system, saying investors and depositors would be less likely to do a thorough analysis of banks knowing that more of their deposits are backed by the federal government. Fed Chairman Alan Greenspan said the increase would provide more subsidies to wealthy Americans who have over $100,000 in deposits in accounts, and that it would put the bank deposit insurance funds at greater risk. Senate Banking Committee Chairman Phil Gram (R-Texas) believes an increase moves the risks from the investor to the federal government and eventually tax payers. Gramm thinks deposit insurance should be lowered to around $50,000. The Independent Community Bankers of America supports raising the insurance, saying there's a growing number of consumers who have over $100,000 in their accounts, and that community banks want to utilize the higher coverage levels to attract more deposits so they can fund more consumer and small business loans. The American Bankers Association also supports an increase, arguing that if indexed for inflation the $100,000 existing cap would be near $200,000. Smaller banks especially are supporting an increase because they believe it will help them attract more deposits by having a stronger guarantee for consumers. They also say it would help them compete against large banks that are often viewed as "too big to fail." Senator Tim Johnson (D-S.D.), who introduced a bill to raise bank deposit insurance, said it would give rural Americans an opportunity to invest in rural banks. He called it an important step for rural America to keep local wealth in these smaller communities. Many analysts believe banks are looking for a way to get back some of the money that is flowing into stocks and mutual funds. The FDIC's just-released Quarterly Banking Profile showed deposits in commercial banks fell for the eighth time in nine quarters to 72.4%. Since the issue has come up, many industry analysts point out that the increase in insurance deposit coverage from $40,000 to $100,000 in the early `80s was really a response to the S&L crisis, and that it may not even have been necessary. In the credit union industry, there doesn't seem to be any consensus about whether increasing deposit insurance would have a big impact on assisting CUs in attracting deposits. However there is an ongoing study going on the issue so to speak as a number of credit unions are already offering deposit insurance in excess of $100,000. American Share Insurance, Dublin, Ohio, is the largest provider of excess share insurance to the credit union industry. ASI currently provides excess coverage to some 260 credit unions. "I think conceptually the idea of saying credit union members don't have a lot of money is flawed. Increased deposit insurance can attract affluent members," said Nick Damopoulos, vice president of marketing for ASI. "Normally a credit union gets in this program and in less than a year they attract enough new deposits that they can offset any costs associated with this program," he said. ASI will insure accounts up to $250,000. It currently has $2.5 billion worth of excess insurance in force. It can provide excess insurance in 27 states. The average credit union engaging in excess insurance has an asset size of around $165 million. "It's somewhat restricted by size. The larger credit unions tend to have the members with dollars," said Damopoulus. He noted that since 1993 the number of CUs in ASI's excess share insurance program has increased by over 340% and the amount of shares by 400%. NAFCU economist Dr. Tun Wai said he has looked at the data on the 146 FCUs that have excess insurance, and the jury is still out on whether or not it is helping them attract more deposits because there is a chicken or the egg scenario to consider. "They did have an excess growth in deposits. The excess insurance did seem to attract more savings," said Wai. "The flip side of that is they also tend to have higher rates, so we do not know if it's the higher insurance coverage that is encouraging more saving, or is the higher insurance making the manager and the board feel more comfortable to offer higher rates," said Wai. Wai said some of the excess insurance CUs he talked to said they believe their boards feel more comfortable with the excess insurance, and tend to offer higher rates. He also said that the reason many of them obtained excess insurance last year was because of Y2K. Unless there were a flood of new deposits due to increased coverage, there likely wouldn't be much of an increase in insurance costs to credit unions given that 94% of all credit union deposits are currently covered by the NCUSIF, said Wai. David Chatfield, president of the California Credit Union League, thinks more work should be done in the banking industry before deposit insurance is raised. "As Chairman Greenspan pointed out, doubling the limit on federal deposit insurance for banks would amount to giving increased subsidies to upper-income individuals, and could lead to riskier behavior by banks," said Chatfield. The California League has asked NCUA to work with the FDIC on looking at the feasibility of raising deposit coverage. "If the banking industry wishes to double the FDIC cap, it should be willing to pay for it. Credit unions have established a superior precedent in providing more than adequate capitalization for our own deposit insurance fund. Banks should do the same." Another argument against not raising deposit insurance from a consumer's perspective, is that the consumer can put money in federally insured accounts at other institutions. Analysts say because of that ability, raising the insurance level will never be a true consumer protection issue. -pgentile@cutimes.com