A Deep Dive into the Hagerty-Alsobrooks Bill
As former community bank CEOs and chairmen of the Independent Community Bankers of America (ICBA), we have consistently advocated for policies that bolster community banks and safeguard the integrity of our financial system. However, with due respect to the current leadership, we believe the 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 misguided.
The Potential Pitfalls of the Bill
Many criticisms of the bill have centered on the potential for increased moral hazard and raised costs for banks, despite claims to the contrary. Although these concerns are valid, we believe there is another, largely overlooked issue: the disproportionate benefit that this bill would confer on tax-exempt credit unions. If passed, the bill could significantly exacerbate an already uneven competitive landscape between FDIC insured banks and credit unions.
Credit Unions: Growing Giants
Any small banker knows the score: Credit union assets have skyrocketed to $2.4 trillion, membership is escalating (now at 145 million members nationwide), and their commercial ambitions are growing. In the past decade alone, commercial deposits and public funds at credit unions have grown fivefold. Moreover, credit unions are utilizing their tax advantages to buy up small banks at an unprecedented rate, with a record number of acquisitions occurring in 2024 and ten more deals announced this year. ICBA has been at the forefront of opposing this trend, a stance we commend.
The Hagerty-Alsobrooks Bill: A Boon for Credit Unions?
However, we are perplexed by ICBA’s support of the Hagerty-Alsobrooks bill. We foresee a future where credit unions have access to $10 million worth of deposit insurance for even non-interest-bearing accounts. The result? An increase in business and municipal accounts for credit unions, more community banks sold, and a further skewing of the competitive landscape against community banks.
The Potential Impact on Community Banks
Currently, community banks hold a distinct advantage when it comes to higher dollar and business deposits, as business customers represent less than 5% of credit union deposits. However, if credit unions are offered $10 million worth of coverage, 40 times the current $250,000 limit, for non-interest-bearing transaction accounts, this advantage could disappear. With such extensive deposit insurance, credit unions could aggressively market themselves as a safe haven for large deposits. Businesses, municipalities, and nonprofits may then have incentives to shift funds from community banks to credit unions, potentially offering more attractive benefits due to their tax-advantaged status.
The Unintended Consequences
Furthermore, the bill could accelerate mission drift for credit unions. Originally chartered to serve low- and moderate-income consumers, credit unions were not intended to compete for multi-million-dollar commercial accounts. They don’t even require higher levels of deposit insurance, with insured deposits already constituting 90% of all credit union deposits. The Hagerty-Alsobrooks bill could inadvertently fuel credit unions’ transformation into tax-exempt commercial banks, further tilting the playing field.
A Trojan Horse for Community Banks?
While supporters of the bill might argue that it will protect community banks, we see it as a potential Trojan Horse. If passed, the bill could harm the banking sector more than it helps, particularly given the potential for higher premiums and increased regulatory scrutiny. The most concerning aspect, however, is that it would disproportionately aid credit unions over community banks. Considering the ample ways community banks already have to assist small businesses, municipalities, and nonprofits, we argue that a massive deposit insurance guarantee for credit unions is unnecessary and potentially detrimental to our industry.
Conclusion
In summary, while the Hagerty-Alsobrooks bill may be presented as a gift for community banks, it could instead seal our fate. We urge lawmakers to reconsider their support and take into account the potential repercussions for our financial system.
Source: Here
