Conservatives: Don’t Increase Account Insurance Beyond $250,000

NCUA would be included in any increase as credit union groups call for parity with FDIC.

As policymakers struggle to deal with the aftermath of the failure of two major banks, a coalition of more than 20 conservative groups is asking Congress to reject calls to increase the maximum account federal insurance beyond the current $250,000.

“Any enhanced deposit insurance framework would increase moral hazard, propagate a cycle of risky behavior that will force taxpayers to perennially bail out depositors, and subject insured depository institutions to more government control,” the groups, including Americans for Tax Reform, the National Taxpayers Union and the Competitiveness Enterprise Institute, said in a letter to lawmakers late last week.

Backstory

When Silicon Valley Bank and Signature Bank recently failed, the Biden Administration agreed to insure all accounts at the banks to avoid a ripple effect that could have resulted in account-holder employers being unable to pay their employees.

Since then, lawmakers and others have discussed whether the maximum federal insurance should be increased beyond $250,000.

While much of the debate centers on the FDIC, the NCUA no doubt would be included in any increase. The agency has not taken a position on the issue and has instead deferred to Congress, which would have to enact legislation instituting such a change.

Response from CU Groups

Credit union trade groups repeatedly have pointed out that while 50% of bank deposits are insured, more than 90% of those at credit union are.

As the House and Senate prepared for hearings on the bank failures late last month, NAFCU asked Congress to ensure that the NCUA’s Share Insurance Fund insured accounts at the same level as the FDIC.

“While we are not advocating for changes for coverage limits for the NCUSIF at this time, any changes to FDIC coverage levels must include parity in coverage levels for the NCUSIF while not changing the tried and tested structure, funding, and operations of the NCUSIF,” Brad Thaler, NAFCU’s vice president of legislative affairs, wrote, in a letter to the House Financial Services Committee. “We urge you to ensure that problems from a few banks do not create new burdens for well-run credit unions in an effort to respond to this recent situation.”

Democrats in Favor of Raising Threshold

Some Democrats have endorsed proposals to increase the maximum level of insured deposits.

Rep. Maxine Waters, D-N.Y., the ranking Democrat on the House Financial Services Committee, recently told the New York Times that Congress should consider raising the maximum level of insurance.

And Sen. Elizabeth Warren, D-Mass., a member of the Senate Banking Committee, has likewise suggested increasing the cap.

Conservative Pushback

However, the conservative groups criticized the Biden Administration for insuring the accounts of wealthy customers at the two failed banks.

“These financially sophisticated millionaires should have known better and should not have been bailed out,” they wrote.

The groups said further that any increased insurance would result in higher fees paid by financial institutions which, in turn, would pass them on to consumers.

“The cost of these fees will be passed down to American consumers in the form of more expensive banking services, such as higher costs to receive a revolving line of credit through a credit card, which 83 percent of Americans use every day,” the letter states.

The coalition added that an increase also would make the banking sector more reliant on the federal government.

Further Context

In a recent report, the Congressional Research Service said that quelling a bank crisis usually results in the federal government protecting depositors regardless of the size of their accounts.

The CRS noted that typical bank customers hold much less than $250,000 in a bank account and, as a result, a run on banks that provide mostly traditional checking accounts is unlikely.

However, many commercial customers at Silicon Valley and Signature had accounts exceeding $250,000.

“Because of the swift nature of the banks’ deterioration, their size, and the fear that a run would spread to other banks, the federal banking agencies decided to protect all of the banks’ depositors, both insured and uninsured, by invoking its systemic risk exception to least cost resolution,” the report stated.

The CRS also estimated that if the FDIC decides to provide insurance coverage to all deposits, it would have to increase its insurance fund to cover at least another $9 trillion in deposits.