Beware of strings attached to $200,000 "gifts"

There's a lot of FDIC-inspired talk in Washington, D.C. these days regarding the doubling of the federal deposit insurance coverage from $100,000 to $200,000 per individual account at federally-insured deposit financial institutions. The conversation so far has centered on the benefits such a move would bring to the various insuring agencies, those financial institutions that are under their collective umbrella, and individual consumers receiving the added protection. As the rhetoric has become more lively, it has inspired proposed studies, legislative initiatives, and regulatory discussion. In reality, however, the raise-the-insurance-coverage proposal is generating far more questions than answers, especially for credit unions. The most obvious of these questions is, "Why do it?" Does anyone in credit union land actually know how many of the approximately 80 million credit union members have $100,000 in a credit union account? More to the point, how many credit union members would put as much as another $100,000 in their CU if it would also be covered by deposit insurance? I confess I don't have any idea, but my gut feeling is that the number of depositors at that level in the typical credit union is pretty miniscule. If I'm correct, why would credit union interests even get involved, let alone have industry lobbyists push for the increased coverage? For one reason, if it goes through and all financial institutions except credit unions provide the additional coverage, credit unions could find themselves at a competitive disadvantage. Also, with only credit unions remaining at the $100,000 threshold, a perception could be created that credit unions are either second class organizations or worse, not as safe as competitors. On the other hand, if credit unions get swept up in the move to increase the basic insurance coverage amount, credit unions could be looking at some negative fall out. For example, part of the package under discussion involves merging the various insurance funds. That could include the credit union fund. Carrying that scenario a step further, in the eyes of some politicians and competitors at least, that might make credit unions appear to be just like banks. After all, banks and credit unions covered under a super insurer dominated by massive banking industry assets, would not bode well for the, "but credit unions are different," argument. It wouldn't be long before the government merger thought process would go the next step. If a merger of the insurance funds is such a good idea, then why not merge the regulatory agencies as well, including NCUA? At that point, credit unions would have a major front burner problem to face. Think about it. With one government agency insuring all financial institutions, and one government agency regulating all financial institutions, it wouldn't be long before some bureaucrat would start waving the "cost-cutting" flag and propose that a single charter for all financial institutions would make sense. After all, the precedent for one size fits all has already been established. Interesting that such a potential disaster for credit unions actually started out as a seemingly simple trial balloon floated by FDIC Chairman Donna Tanoue last March. Such are the ways of Washington, D.C. But there's even more to consider from a credit union viewpoint. It has to do with attempting to fix something that isn't broken. Putting it another way, the credit union share insurance fund is in great shape. Regular refunds, rather than annual premiums, because the CU fund reaches and exceeds the statutory percentage requirement for funds on deposit, to name one. No clamoring by anyone connected with credit unions, especial CU members, that the added coverage is really needed, to name another. The bottom line is that Congress is not known for bestowing goodies without getting something in return. The goodies in this case is getting a federal guaranty up to $200,000. Some might also feel a goodie is making smaller financial institutions more competitive against their behemoth brethren The getting something in return part could take the form of higher premiums, or a plethora of tie-in regulations regarding, for example, privacy, Internet policies and procedures, predatory lending, loan limits, even more onerous Community Reinvestment Act (CRA) provisions, etc. Uncle Sam doesn't give anything away without strings attached. Is it all worth it? The more the original Tanoue proposal takes on a life of its own, the less worthwhile any change seems to be of any real benefit to both financial institutions and the consumers they serve. A brief history lesson may be in order. About 20 years ago, the coverage was upped from $40,000 per individual account to $100,000. There are still those in financial circles and in Congress who vividly recall one of the consequences of that move. It's called the savings and loan disaster. No, the coverage itself didn't cause the collapse of an up-to-then important sector of the financial services industry, but it did aid and abet it. Having a more-than-double safety net encouraged bad managers to practice bad management. So we make mistakes, the conventional wisdom went at the time. Don't worry, the insurance fund is there to protect us. Among the many reasons cited for the collapse of the S&L industry and the costly bailout, bad management is at the top of or near the top of everyone's list. So what makes sense out of all this for credit unions? Put simply, credit unions need to proceed with diligence and caution as the $200,000 proposal moves slowly along. Credit unions shouldn't aggressively push for it, but neither should credit unions outright reject it, especially if passage and implementation of the higher insurance limit becomes inevitable. That is, unless the strings attached start to look more like chains, and if insurance fund and regulatory agency mergers become part of the lexicon. If that happens, the entire credit union industry needs to run for the nearest pulpit to preach anew the credit union difference. Comments? Call 1-800-345-9936, Ext. 15, or Fax 561-683-8514, or E-mail mwelch@cutimes.com.