Even amended, the Hagerty-Alsobrooks bill remains the wrong answer

• Key insight: A better alternative to the amended Hagerty-Alsobrooks bill would be to reactivate the Transaction Account Guarantee program as needed.
• What's at stake: The bill risks accelerating credit unions' march into business banking while saddling the rest of the system with the costs and distortions that follow.
• Expert quote: Emergency TAG "would help to stabilize community bank deposits in a financial crisis." —ICBA President and CEO Rebeca Romero Rainey

A few months ago, we argued that the Hagerty-Alsobrooks deposit insurance bill was being sold as a gift to community banks when it was really a gift to credit unions.

The sponsors have now revised the bill, cutting the proposed special deposit insurance cap for noninterest-bearing transaction accounts from a 40-fold increase over today's $250,000 limit to a potential 20-fold increase, or up to $5 million. But reducing the number does not fix the underlying problem. The revised bill still gives credit unions a new government-backed opening into business, nonprofit and municipal accounts they have not historically occupied at scale. And the bill still worsens the already uneven playing field between tax-exempt credit unions and community banks.

That is why the better answer is not a revised Hagerty-Alsobrooks bill. It is restoring the Transaction Account Guarantee program, or TAG, which ran from 2008 to 2012. It allowed banks to offer unlimited backing for non-transaction accounts, but only on a temporary basis.

That is TAG's one great virtue over Hagerty-Alsbrooks: It is not permanent. It is an emergency tool designed to stop panic-driven deposit flight during a crisis, not an irreversible expansion of the federal safety net.

A temporary guarantee helps to calm anxious depositors, but it does not forever change the incentives of banks, credit unions or depositors. In contrast, a standing $5 million guarantee does. Once the government tells the market that certain high-balance transaction accounts can enjoy much more protection, institutions will compete aggressively for those balances. Credit unions in particular would have every reason to push harder into commercial accounts, payroll relationships, nonprofit deposits and local government funds. And credit unions would have even more incentives to step up their acquisitions of community banks, further eroding the tax base.

That is the same fundamental problem we highlighted before, and it has not changed just because the headline number is smaller.

Supporters of the revised bill may respond that the new guarantee applies only to noninterest-bearing transaction accounts, as if that solves the competitive problem. But institutions do not need to pay explicit interest to make these accounts attractive. They can compete through bundled services, fee waivers, treasury-management perks, relationship pricing and other incentives.

In other words, this is an easy system to game, and that's exactly what credit unions will do, the same way they already game their own membership rules. Credit union members are supposed to be limited to those with a common bond, but that restriction went out the window years ago as they aggressively redefined common bond to all air-breathing mammals. Trust us, credit unions can walk all over a so-called restriction on noninterest-bearing transaction accounts.

But TAG does not create the same long-term opening. Since it only happens in a crisis, large commercial customers would know the extra protection is temporary. They might value it in a panic, exactly as intended, but they would not build long-term banking relationships around it. That sharply limits the ability of credit unions to use emergency protections as a lasting business-development tool. In other words, TAG can help stabilize deposits without permanently handing credit unions a new market advantage.

That's why we're proud to see that the Independent Community Bankers of America, of which we are former chairmen, is endorsing a TAG bill by Rep. Andy Barr, R-Ky. We agree wholeheartedly with ICBA President and CEO Rebeca Romero Rainey, who said that emergency TAG "would help to stabilize community bank deposits in a financial crisis."

Federal Deposit Insurance Corp. Chairman Travis Hill has also sp

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oken favorably of TAG, telling bankers recently that policymakers should consider creating a "time-limited, system-wide guarantee that had proper guardrails in place. That could be a mechanism to restore confidence across the system without perpetuating this two-tier framework."

Rainey and Chairman Hill are right. If the concern is panic-driven deposit flight, then the answer should be a panic-fighting tool. TAG fits that description. The revised Hagerty-Alsobrooks bill does not. It creates a lasting new category of government-backed coverage, with all the moral hazard, pricing questions and competitive distortions that come with it. Most worryingly for us, the Hagerty-Alsobrooks bill risks accelerating credit unions' march into business banking while saddling the rest of the system with the costs and distortions that follow.

And those pricing and implementation questions are not trivial. The FDIC itself has told Congress that current call report data does not cleanly break out all the account categories lawmakers would need to identify and estimate the effects of a permanent coverage expansion. That should be a warning sign. The Hagerty-Alsobrooks bill is trying to build a more bespoke permanent guarantee than the available data supports. The fact that supporters started with $20 million, then moved to $10 million and are now pushing $5 million is a clear sign that they are pushing a narrative first without having the underlying data to support it. That is another reason to prefer a simpler emergency backstop over a standing redesign.

Community bankers should not let a smaller number fool them into embracing the same basic mistake. Moving from a 40-fold increase to a 20-fold increase does not solve the bill's credit union problem. It just makes the sales pitch sound more modest. If policymakers want to permanently give credit unions a stronger hand in competing for large business balances, the Hagerty-Alsobrooks bill still does that.

But if policymakers want a temporary way to stop destabilizing runs in a crisis, restore TAG. To us, the choice is clear.