WASHINGTON – As credit unions join the rest of the financial industry in awaiting any potential new “bailout” legislation from Congress, a plan is being put forward in Washington that would represent the first general deposit insurance increase in nearly 30 years as part of the bill to stabilize the financial markets.
Already, both major presidential candidates are backing raising the limit to $250,000 per depositor for FDIC coverage, saying it would help soothe the fears of both depositors and small businesses. Yesterday, NCUA Chairman Michael Fryzel said he backs a similar increase in insurance limits for accounts backed by the NCUSIF, as well. “Increasing federal insurance coverage for credit union members would send an important signal of reassurance at a time when confidence in depository institutions generally has been compromised by market events,” Fryzel said, adding, “I cannot overstate how important it is that the protections offered by our two insurance funds remain parallel.”
One option would be to give the Federal Deposit Insurance Corp. temporary emergency power to increase coverage. That idea, which the agency said it supports, yesterday gained traction as lawmakers sought to attract more support for the legislation, which failed a House vote Monday.
FDIC Chairman Sheila Bair said her agency potentially would have to borrow from the Treasury to support higher coverage, but that would "need to be paid back through the FDIC's primary funding source – industry assessments."
Even though banks and thrifts would face higher costs, industry representatives supported the idea, arguing that it could help curb runs and ease other consumer concerns.
During the contentious vote Monday, several lawmakers who opposed the bill raised the prospect of increasing deposit insurance instead.
To secure their support, House and Senate leaders began contemplating a way to add such a provision to the bill. One provision under consideration Tuesday would allow the FDIC to back any deposit temporarily in the event of a bank failure – provided it consulted first with the Treasury Department and the Federal Reserve Board.
Both the Treasury and the Fed have adamantly opposed a coverage hike in the past, and sources said they did not initially support adding a coverage increase to the bailout bill. Ultimately, however, both appeared willing to agree to the provision if it secured the bill's passage, according to American Banker, an affiliate of Credit Union Journal.
How long the added coverage would last is unclear. The provision is likely to give the FDIC the power to raise the limit for the rest of the housing crisis.
In the meantime, lawmakers may consider a permanent hike in the insurance limit – something House Financial Services Committee Chairman Barney Frank said he would look at next year.
Industry representatives said a coverage increase made sense. "Under the current market circumstances, we are working for and would support some type of temporary increase in deposit insurance coverage," said Edward Yingling, the president of the American Bankers Association. "We would expect to pay" for the increase, but "we don't think it would increase the cost too much" on banks.
At issue is how a coverage increase would affect the Deposit Insurance Fund. Covering uninsured deposits in a failure usually increases the cost of a collapse. The lower the fund goes, the more banks must pay in premiums to make up the shortfall.
Additionally, insuring more deposits automatically would lower the ratio of federal reserves to insured deposits, the benchmark the FDIC uses to gauge the fund's health. At the end of the second quarter the ratio was 1.01%, or 14 basis points below its statutory minimum, and the FDIC is expected to set new assessment rates this month.
As of July of this year, the National CU Share Insurance Fund reserve ratio was 1.22% (dollars reserved per $100 of insured deposits), below NCUA's minimum level. If the fund ends the year under a 1.25% ratio NCUA is required to charge credit unions a premium to replenish the reserves.
