Coverage Switching by Credit Unions Worries Regulator

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A top credit union regulator said she is feeling "great anxiety" that more state-chartered credit unions are contemplating a switch to private deposit insurance.

The number of credit unions that have made the switch is still small, but one of the most recent to announce such plans, the $2 billion-asset Patelco Credit Union in San Francisco, is a significant player. The private insurance will be provided American Share Insurance of Dublin, Ohio.

At a convention of the National Association of State Credit Union Supervisors this month in New Orleans, Deborah Matz, a board member at the National Credit Union Administration, said that credit unions "have every right" to switch to commercial insurance.

However, "I'm concerned that these credit unions aren't being examined as well as they should be," she said. "If there's a loss, it's going to hurt the entire credit union industry."

According to the state credit union supervisors group, 229 state credit unions and another 165 in Puerto Rico are privately insured, the majority by American Share Insurance.

Patelco's chief executive officer, Ed Callahan, said it chose private insurance because $480 million of its deposits were not covered by the National Credit Union Share Insurance Fund. (Like the Federal Deposit Insurance Corp.'s Bank Insurance Fund, that fund covers only accounts of up to $100,000.)

However, some attendees at the meeting surmised that Mr. Callahan - the former chairman of the NCUA who is now an outspoken critic of the agency's spending habits - wanted to send a strong message in the months before his retirement in December.

At Patelco, a special committee formed in April recommended private insurance and put it to a vote. About 66,000 members responded, with 61% voting in favor and 39% opposed.

"I believe that this will be a niche that will be a competitive advantage," because all of its deposits are now covered, Mr. Callahan said. "The reality is that it is up to $250,000 for each account a member has," but members can simply open more accounts when they reach the limit, he said.

For its part, the NCUA has sent public service announcements to radio stations in certain markets explaining that there are a number of ways to make sure that assets are insured, such as opening separate accounts when one account goes over the insurance limit.

After listening to Mr. Callahan, one credit union leader said private insurance was worth considering but expressed concern about one downside: Privately insured credit unions are not eligible for membership in Federal Home Loan banks. The state supervisors group is pushing for federal legislation to change that.

Mr. Callahan said that Patelco members who were not comfortable with its decision to switch to private insurance would be assisted in finding a nearby credit union that still has federal insurance coverage.

"As far as I'm concerned, we would be a good example to take to Capitol Hill and show that Americans really would like more coverage," he said.

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