By Robert Flock
ABA DataBank
As the credit union low-income designation, or LID, has become widespread and is increasingly exploited by large, commercially active institutions, its interaction with other policy frameworks — particularly deposit insurance, tax policy and lending constraints — must be considered.
In the context of proposed expansions of business transaction account insurance, LID status is not incidental; it materially shapes which institutions are best positioned to attract large operating balances and determine how those balances are deployed. In practice, that means expanded coverage could further enable large LID credit unions to use mission-based statutory privileges for outsized commercial advantage.
As policymakers consider reforms to modernize the deposit insurance framework, a careful examination of these interactions is essential. Expanding insured coverage without assessing how the LID functions in today’s market risks reinforcing competitive inequities between banks and credit unions, as well as within the credit union system itself. A clearer understanding of how longstanding statutory authorities now operate would help ensure that deposit insurance reform strengthens stability and confidence — without unintentionally distorting competition in a system that has evolved well beyond its original design parameters.
From targeted tool to mainstream designation
When Congress and regulators established the LID in the mid‑1990s, it was intended as a targeted tool for a relatively small subset of credit unions. As of November 1995, just 260 institutions were designated as serving predominantly low‑income consumers.
By the end of 2025, however, 2,390 credit unions — approximately 56% of all federally insured credit unions — held the designation, representing a substantial and growing share of total system assets and deposits (see Figure 1). This expansion reflects changes in eligibility thresholds as well as the strategic appeal of the privileges offered by a LID. For example, LID credit unions enjoy exemptions from the statutory cap on member business lending and can accept non-member deposits.
The current LID credit union population includes some of the largest and most commercially active credit unions in the country — institutions that are acquiring tax‑paying banks and investing heavily in national branding, including stadium naming rights. In fact, 10 of the 20 largest credit unions in the U.S. have received low-income designations, with average assets that exceed $16.6 billion. That evolution underscores the importance of assessing the interplay between LID‑related statutory exemptions and deposit insurance coverage for institutions operating at this level.
Broader deposits
Over the past several years, credit unions have experienced significant balance sheet growth and an evolving funding mix that includes increased reliance on larger‑balance accounts and deposit categories. Aggregated call report data show that LID credit unions hold a disproportionately large share of non-member deposits relative to their non‑LID peers (see Figure 2).
While these deposits are subject to existing supervisory frameworks, they introduce greater complexity from a policy perspective. In particular, they sharpen questions of competitive neutrality when credit unions that benefit from statutory tax exemptions and other charter‑based advantages compete for the same funding sources as tax‑paying banks.
Deposit insurance coverage plays a central role in shaping depositor behavior and institutional funding strategies. As recent experience demonstrates, the level of coverage can materially influence where large balances, such as those from businesses, choose to place their deposits.
Competitive neutrality and institutional parity
LID credit unions’ enhanced deposit and lending authorities take on added policy relevance amid proposals to raise the deposit insurance limit for business transaction accounts from $250,000 to $5 million or $10 million. Proponents frame these changes as leveling the playing field by protecting payroll and operating balances and reducing destabilizing deposit flight. The key question, however, is distributional: Which institutions are structurally positioned to capture the largest marginal benefit from expanded coverage, and how would that reshape competition across charters, within the credit union system itself and across the financial system more broadly?
That distributional question is especially acute for LID credit unions, because the designation bundles deposit and lending authorities that set them apart from other credit unions and from banks. On the deposit side, low‑income designation creates a clear distinction within the credit union system:
- Most credit unions face restrictions on accepting non-member deposits and are generally limited in both the sources and aggregate amounts of such funding.
- An LID credit union, however, may accept deposits from any non-member source, including businesses, municipalities and other institutional entities.
As a result, LID credit unions can serve as repositories for large institutional and public institution deposits in a way that non‑LID credit unions generally cannot. These dynamics are particularly salient for public‑sector operating accounts, which have historically been a core funding source for community and regional banks, and are increasingly contested as deposit insurance coverage expands. Combined with their tax exemption and the absence of Community Reinvestment Act obligations, that authority creates a material competitive advantage over tax‑paying banks and non‑LID credit unions.
The same pattern holds on the lending side. Credit unions remain constrained by the statutory 12.25% cap on member business loans, consistent with Congress’s determination that credit union commercial lending should remain secondary to a retail‑focused cooperative mission. LID credit unions, however, are exempt from that cap. ABA analysis has found that LID credit unions now carry 73% higher MBL balances than non-LID credit unions, and the growth in LID status has closely tracked the system’s broader expansion into commercial lending. In effect, the MBL cap exemption amplifies other charter‑based advantages, widening competitive gaps with banks and deepening divergence between LID and non‑LID credit unions.
Taken together, these authorities help explain why business transaction account insurance proposals could have effects that extend well beyond depositor protection. Raising insured limits would reduce disincentives for large operating balances, making it easier for businesses and institutions to concentrate funds at fewer institutions. Institutions with broader access to non-member and institutional funding — plus fewer constraints on commercial lending growth — would be best positioned to capture and deploy those balances. The result would not only magnify competitive inequities between tax‑paying, CRA‑covered banks and tax‑exempt credit unions; it would also widen disparities within the credit union sector by advantaging LID credit unions relative to non‑LID credit unions that face tighter statutory constraints.
A formal review would strengthen — not weaken — the system
The policy dynamics described above call for a review of how credit union statutory authorities operate in combination, particularly as the sector grows and consolidates. Deposit insurance reform does not occur in isolation; it intersects with tax policy, charter‑based authorities, and the expanding role of credit unions in commercial and institutional finance. A clear account of those intersections would strengthen the policy foundation for any deposit insurance coverage changes within the credit union industry.
Such a review would also allow policymakers to better assess the implications for the National Credit Union Share Insurance Fund as insurance coverage expands into larger and more institutionally concentrated operating balances.
A Treasury-led review, conducted in coordination with the relevant banking and credit union regulators, would help fill that gap. Today, no single policy forum fully captures how LID status, expanded non-member deposit authority, exemption from the member business loan cap, tax-exempt status and differences in public disclosure, including the absence of IRS Form 990 filings by federal credit unions, interact across a growing share of the credit union sector.
Such a review could assess how these features shape balance sheet composition and competitive dynamics across institution size and business models, particularly in markets increasingly defined by competition for large operating balances. More broadly, it would provide policymakers with a clearer basis for evaluating whether changes to deposit insurance, tax policy and supervision remain well aligned across charters.
Conclusion
For decades, LID has been justified as a means of expanding access to credit and financial services in underserved communities. But as the designation has spread to larger, more commercially active institutions, its mission-based objective risks being overwhelmed by its use as a channel for expanded authority to gather business and institutional deposits and grow commercial lending. Accordingly, the central policy question is no longer simply whether greater competitive parity between banks and credit unions is desirable, but whether that shift is being advanced through a framework that still aligns with the original rationale for credit union tax and supervisory treatment.
Any proposal to expand business transaction account insurance should be accompanied by a formal review of the credit union policy and supervisory framework. If credit unions are to receive broader authority to compete for business operating balances and expand commercial activity, policymakers should also reexamine the justification for the low-income designation, associated tax exemptions and related supervisory distinctions. Such a review would help establish a clearer policy basis for any change, while testing whether the current framework remains appropriate for the size, activities and competitive posture of today’s LID credit unions.
Robert Flock is SVP for strategic engagement at ABA.
