As a former CEO of a $400 million-asset community bank in Louisiana for more than two decades, I know you can’t just take someone’s word for something. If something looks too good to be true, it usually is.
That’s what sprung to mind when I read the Main Street Protection Act (S.2999), which would raise the deposit insurance limit to $10 million for non-interest-bearing transaction accounts. Midsize bank supporters of the bill claim it isn’t a bailout, won’t spur moral hazard, and represents targeted reform. Unfortunately, they are wrong on all counts.
There are two kinds of costs to every deal: the upfront and the hidden. This bill is too expensive in both respects.
Upfront, this bill dangles a carrot to community banks, promising that those under $10 billion of assets do not need to pay the costs of recapitalizing the Federal Deposit Insurance Corporation (FDIC) after adding so many insured deposits to the system.
There are at least three problems with this. First, after a transition period of ten years, community banks will pay more in premiums because it will cost more to keep the FDIC fund at its legal minimum. Second, what happens when there are more failures caused because the riskiest banks made bets with $10 million worth of coverage? Is the FDIC not going to charge small banks when the agency’s fund is wiped out due to expensive failures? Finally, I’ve learned not to trust government promises. A future administration or Congress could change their minds with the stroke of a pen.
The bill is also not targeted reform. It would cover all non-interest-bearing transaction accounts, not just the business accounts that supporters claim need support. Any banker or customer could game that system, encouraging more moral hazard. This is a handout to the riskiest banks.
But it’s hidden costs I worry about most. Where there are carrots, there are sticks—in the form of massive regulatory strings attached. By accepting this massive government guarantee, community banks should expect increased regulatory requirements, not the lighter touch “right-sizing” of supervisory standards we’ve long advocated for. During previous administrations, we’ve watched as banks were put on the firing line for cultural issues or demands to hand over private financial data. We fought back and won, but will that be true next time if a $10 million check is sent our way?
Sen. Elizabeth Warren, the architect of the Consumer Financial Protection Bureau, has already said there needs to be “tougher oversight to ensure that banks don’t take advantage of this additional insurance to engage in riskier behavior.”
What happens when risky banks use this higher coverage to make bad bets and go bust? Increased moral hazard inevitably leads to greater risk-taking, which always works to the detriment of Main Street. Regulatory lapses are always answered with more regulation—and that regulation is expensive. This bill lays the groundwork for another assault on community banks.
I can’t help but ask why we would also extend this $10 million worth of coverage to credit unions. These institutions don’t pay federal taxes and community banks like mine have been competing on that unlevel playing field. Credit union supporters say they are only helping low- and moderate-income consumers. So why would a credit union then need to offer a customer $10 million of insurance? That’s far from very low- or moderate-income. But that’s the kind of devil’s bargain passing something like this entails. We won’t fully understand what we are giving up until it’s too late.
This bill is a bailout for the midsize banks that are too big to know their customers but too small for the government to protect them in a collapse. They are the ones leading the charge for more coverage, falsely claiming they are doing this for Main Street, when the real purpose is to give themselves a competitive advantage.
It’s also not targeted reform. While some consider this bill manna from heaven, history and common sense are flashing a “DANGER” sign. We should heed that warning and not pass this bill.
Preston Kennedy is the past chairman of the Independent Community Bankers of America (ICBA) and the vice chairman and president emeritus of Bank of Zachary In Louisiana.
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