In a rare lobbying initiative, the NCUA board has expressed its opposition to state regulators in Colorado to a proposal that would allow state-chartered credit unions to opt for the private deposit insurance alternative.
An extraordinary letter sent earlier this month to Colorado's CU Commissioner David Paul and signed by all three NCUA board members falls just short of criticizing the private insurance option, but broadly details the benefits of the full faith and credit of the National CU Share Insurance Fund while discussing some of the shortcomings and past scandals involving private insurance.
"We recognize that this is a public policy decision that is properly within your jurisdiction," the NCUA board told Paul. "However, as the federal agency charged by Congress with the responsibility of administering the (NCUSIF), we would like to highlight the benefits of federal share insurance and some of the issues we feel you should consider when comparing private and federal share insurance.
"In our view, federal share insurance, backed by the full faith and credit of the United States government, is the superior product for credit unions, their members, and public policy," the NCUA board told Paul.
The rare lobbying effort by NCUA comes as senior NCUA officials and board members have become increasingly concerned about potential defections from the federal insurance system following this fall's conversion by the $2.8- billion Patelco CU, San Francisco, to private insurance. About a half-dozen credit unions, most of them small, have defected to private insurance over the past four years and several other large credit unions are reported to be considering the move in light of the Patelco conversion.
What apparently is driving the move is that some credit unions are fed up with NCUA, the federal regulator, extending its regulatory reach deep into the state-chartered system through the federal insurance nexus. That is, many rules set by NCUA are extended to state-chartered credit unions by virtue of their being federally insured. Conversion to private insurance, an option only available to state charters, is really the only way for them to escape the reach of NCUA.
The NCUA board alludes somewhat to its extended reach to state charters in the letter to the Colorado commissioner. "As an adjunct to the benefits of federal share insurance, the NCUA has at its disposal a broad range of statutory resources to assist federally insured credit unions, including providing special assistance by way of loans and establishment of special accounts to protect the interests of members of federally insured credit unions," they said.
The call among some at NCUA is "we don't want another RISDIC," referring to the 1991 failure of Rhode Island Share and Deposit Indemnity Corp., which caused the Rhode Island governor to temporarily close all its credit unions and banks. More than two-dozen credit unions insured by RISDIC eventually went under, leaving a long-lasting stain on the concept of private insurance.
Several NCUA officials have publicly expressed their concerns about private insurance and the potential for a major credit union failure, such as Patelco, bringing down the system, something that would cause a RISDIC-like crisis in confidence to all credit unions, they argue.
But the concept of private insurance, only offered for credit unions, has made a comeback in recent years, led by the major surviving insurer, American Share Insurance, of Dublin, Ohio. In fact, the concept has gained credence among many in Congress, where a bill to allow privately insured credit unions entry into the Federal Home Loan Bank System for the first time came close to passage this year.
The issue has also caused a growing rift within the credit union movement, with NAFCU, representing only those credit unions that are required by law to carry federal deposit insurance, opposing the provision, and CUNA and NASCUS supporting it.
At its height, the private insurance option was a popular one among not only credit unions, but S&Ls, as well. In the mid-1980s, prior to RISDIC and before the popularity of federal insurance for credit unions, there was a network of as many as 24 private credit union insurers spread around the country. After RISDIC most of them either voluntarily shut down and liquidated or were forced out when state legislatures mandated federal insurance for credit unions. Beside ASI, the only other survivor is tiny CU Insurance Corp., which insures five state charters in Maryland. Another insurer, Massachusetts CU Insurance Corp., remains in business but only to offer so-called excess coverage, those deposits in excess of the $100,000 per account limit set by NCUSIF and other federal insurance funds.
In its letter, the NCUA board was careful to skirt an explicit opposition to private insurance, but was implicit in its criticisms by recounting the RISDIC debacle and the positions taken by other states that have outlawed the private insurance option since RISDIC. A copy of a comprehensive report on the RISDIC failure was sent along with the letter.
Look for this issue to remain as a major one in the credit union movement in the coming year.
