CUNA: Current Deposit Insurance Not Working for Transaction Accounts

Learn why CUNA is questioning the current deposit insurance setup as well as reiterating the need for parity with banks moving forward.

David Baumann


Jul 3



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David Baumann

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David Baumann

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Letter from credit union group questions current setup, reiterates need for parity with banks moving forward.

The current deposit insurance system may not be working well for accounts whose balances fluctuate frequently based on receipts, payments, payroll and other transactions, CUNA told the NCUA this past week.

“The traditional model of fixed deposit insurance may not be the best way to insure such accounts,” a letter to the NCUA reads.

In commenting on rules currently under review by the agency, CUNA also mentioned deposit insurance, which Congress is reexamining as a result of recent bank failures.

The FDIC has recommended that the deposit insurance system be changed to increase the insurance level for transaction accounts.

Inside the CUNA Letter

In its letter, written by Luke Martone, senior director of advocacy and counsel, CUNA does not explicitly endorse any specific proposal. Instead, it reiterates its request that if Congress increases the deposit insurance for banks insured by the FDIC, it should do the same for credit unions insured by the NCUA.

“Credit unions have many members with accounts for their small and medium sized businesses,” he wrote. “Furthermore, small businesses are more frequently reaching out to their community credit union for lending. These member businesses enjoy the service and stability of doing business with credit unions.”

He asked the NCUA to stress the importance of parity as Congress deals with the issue.

NAFCU also has called on Congress to provide that parity for credit unions.

Where Things Stand on Deposit Insurance

No clear consensus has emerged about how to deal with the deposit insurance dilemma.

Rep. Adam Schiff, D-Calif., has introduced H.R. 3928—legislation that would increase the level of insurance for commercial deposits at banks and credit unions. Those institutions would be required to pay higher assessments in exchange for that increase in insurance.

And while banking trade groups have not rallied behind any specific proposals, some conservative groups have cautioned Congress about increasing deposit insurance at all.

Americans for Tax Reform Brief

“There is extensive academic research concluding that deposit insurance has resulted in systemic risk in the banking sector,” Americans for Tax Reform (ATR) recently said in a research brief.

ATR only addressed FDIC insurance, saying that an increase in the deposit insurance level would allow bank managers to “make riskier investments with deposits, knowing full-well that if the bank cannot meet a surge in deposit withdrawals and the bank goes under, the FDIC will be there to support depositors.”

The group said the Schiff legislation would induce more moral hazard and increase systemic risk.

Heritage Foundation Brief

Researchers at the conservative Heritage Foundation agreed.

They suggest developing a broad system of private insurance.

“Private insurance could reduce the cost of financial crises on the public, but only if there is no public backstop and losses fall on the private insurers,” the foundation wrote in a separate brief.

Heritage said banks could charge fees for storage and payment processing while paying higher rates on other deposits. And, in addition, separate payment services could be provided by financial institutions established specifically for that purpose.

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