Deposit Insurance shows how illusive unity can be

Northwestern Financial Review, Mar 15, 2001 by Bengtson, Tom

President George W. Bush was successful as a governor due to his ability to reach across the ideological aisle and work with people of both political parties. As he campaigned for president, he promised to work for unity. Now he is faced with uniting a deeply divided country. Good luck. Perhaps no group of people better understands how difficult it is to unite a divided flock than bankers.

The effort to raise the deposit insurance coverage level illustrates how divided bankers are. As the issue marks its one-year anniversary, two distinct factions within the industry have lined up on each side of the issue. Many community bankers want deposit insurance coverage levels doubled and they are willing to pay for it. They are convinced higher levels of coverage will bring more deposits into their banks. Even if the deposit gains are modest, they say every little bit helps in this environment of limited liquidity.

On the other side of the issue are the nation's largest banks. They gain absolutely nothing by paying for higher levels of deposit insurance. They know limited deposit insurance does not prevent people from depositing large sums of money with them. We all know government regulators will never shut down a big bank. A bank that is too big to fail has absolutely no incentive to support an arrangement that would require it to pay for higher levels of deposit insurance coverage.

The American Bankers Association is trying to bring these two groups of bankers together, but it is a nearly impossible task. Coming down on either side of the issue means upsetting one group of bankers. Unity is a nice theory but it doesn't always work in practice. Regardless of where ABA is in the deposit insurance debate, it will be interesting to see whether Congress will act on an issue that only has the support of the small-bank sector. My bet is it won't.

That means community bankers can only hope to raise deposit insurance coverage levels a little bit. With the current BIF and SAIF balances, coverage could be increased slightly without falling below the mandated 1.25 percent coverage ratio. This means the insurance would continue to be available to all banks at no charge. This is the only kind of increase that I can imagine the nation's largest banks might support.

Such an increase would still represent a decrease in coverage from 1980 levels, considering the effects of inflation. But this may be as good as it gets. Perhaps unity isn't impossible, just kind of ugly. Let's hope G.W. Bush has better luck uniting the nation.