ICBA's support of higher FDIC coverage is a gift to credit unions

Al Drago/Bloomberg

As former community bank CEOs who have each served as chair of the Independent Community Bankers of America, we have always championed policies that strengthen community banks and protect the integrity of our financial system. But with deep respect to the current group's leadership, its recent endorsement of the Hagerty-Alsobrooks bill — a proposal to provide up to $10 million in deposit insurance coverage for non interest-bearing transaction accounts — is a step in the wrong direction.

Much of the opposition to the bill to date has focused on how it would increase moral hazard and raise costs for banks, despite claims that it would do neither. While we agree those are significant concerns, we see another issue that has not gained much attention: This bill would be a gigantic gift to tax-exempt credit unions. If passed, it would significantly worsen an already unbalanced competitive landscape between FDIC insured banks and credit unions. 

Every small banker knows the deal: Credit union assets have exploded (currently $2.4 trillion), membership is growing (now at 145 million members nationwide) and their commercial ambitions are increasing (commercial deposits and public funds at credit unions have grown fivefold in the past decade). Credit unions are using their tax advantages to buy up small banks nationwide, doing so in record numbers in 2024, with at least ten more deals announced so far this year. ICBA has rightly been leading the fight against this trend, and we commend CEO Rebeca Romero Rainey for her tireless efforts to push back. 

Yet we are bewildered by ICBA's support of the Hagerty-Alsobrooks bill. What does the world look like when credit unions have access to $10 million worth of deposit insurance, even for non interest-bearing accounts? We'll tell you: They will use this increase in funding to worm their way into more business and municipal accounts. And it will only expedite their efforts to buy more community banks, slap their names on more stadiums, put further competitive pressure on the bankers who don't want to sell and gain yet another government-backed advantage against community banks. 

Community banks have a real advantage when it comes to higher dollar and business deposits, as business customers represent less than 5% of credit union deposits, according to data from the National Credit Union Administration. That advantage goes away, however, once you offer credit unions $10 million worth of coverage, 40 times the current $250,000 limit, for non interest-bearing transaction accounts. 

With $10 million in deposit insurance, credit unions can aggressively market themselves as a safe destination for large deposits. Businesses with payroll accounts, municipalities and nonprofits will have incentives to move funds away from community banks to credit unions, who may be able to offer more attractive rewards because of their tax-advantaged status.

Supporters of "The Main Street Protection Act" may try to claim that credit unions won't benefit because they won't be able to offer interest on these accounts and thus cannot successfully steal business away from banks. But gaming this bill is child's play. We remember when banks used to give away free toasters to circumvent interest rate restrictions. Credit unions and banks will be able to offer rewards, discounts, interest credits, free services and other incentives to add funds to these accounts. In so doing, it will undoubtedly add more fuel to credit unions' efforts to expand into small-business lending. 

Deposit insurance

Deposit insurance reform momentum slows in House

Witnesses and lawmakers at a House Financial Services Committee hearing gave a more downcast view of a Senate deposit insurance reform proposal, with many House committee members expressing cost concerns.

By Claire Williams

November 18

Moreover, the bill will accelerate mission drift for credit unions. Credit unions were chartered to serve low- and moderate-income consumers, not compete for multimillion-dollar commercial accounts. They don't even need higher levels of deposit insurance. Insured deposits represent 90% of all credit union deposits as of the end of the third quarter, according to the NCUA. 

The Hagerty-Alsobrooks bill would ultimately turbocharge credit unions' transformation into tax-exempt commercial banks, worsening the unlevel playing field between us. Additionally, it's worth asking whether credit unions, supervised by an agency primarily known for its cheerleading of the industry, will use this added coverage to add more risks to the government's books. 

Overall, there are lots of excellent reasons to think twice about the Hagerty-Alsobrooks bill. The bill as structured will cost banks more in premiums, whether that's in a decade or much earlier if bank failures weaken the Deposit Insurance Fund. And you can bet that Democrats like Sen. Elizabeth Warren will eventually seek much tougher oversight and regulation of banks in return for a greater government guarantee. We remember her saying so back in 2023. We fear a bill like this paves the way for policymakers to one day turn banks into public utilities after the next crisis wipes out the Deposit Insurance Fund and forces the Treasury Department to bailout the fund.

Even laying those reasons aside, however, we cannot ignore the fact that this bill helps credit unions more than community banks, who don't need $10 million worth of deposit insurance coverage because they already have ample ways to assist small businesses, municipalities and nonprofits. Those include reciprocal deposits, Federal Home Loan bank letters of credit and collateralized deposits. We cannot have a massive deposit insurance guarantee extended to credit unions that already use their unfair tax and accounting advantages to decimate our industry.

This bill is being touted as a gift for community banks. Instead, it is a Trojan horse that, if we are unwise enough to accept it, will seal our fate.