State Charters Presented With Five Insurance Options

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A noted bank consultant and expert on deposit insurance has outlined for state-chartered credit unions five options for share insurance reform, none of which will be easy.

At the behest of the National Association of State Credit Union Supervisors (NASCUS), analyst Bert Ely told the group's annual meeting here of his conclusions in addressing NCUA's "unfair" cost advantage in supervising federally chartered credit unions as the result of its "overhead transfer" from the National Credit Union Share Insurance Fund (NCUSIF) to underwrite its operations.

No Easy Answer

The overhead cost transfer effectively shifts a portion of the cost of supervising federally chartered credit unions to federally insured state-chartered credit unions and reduces the dividends the NCUSIF pays to federally insured state credit unions or increases the premiums, he claimed.

"There is no easy answer on this issue for them," Ely told The Credit Union Journal in an interview before his presentation. "There are plusses and minuses in every option, and what is a plus and what is a minus depends a lot on where you are sitting."

Outlining the options to what he admitted is a very complex situation for credit unions, Ely said the first option is to maintain the status quo and try to fix the overhead transfer cost "problem" through legislation or action by the NCUA board. He listed this choice as requiring the least amount of political effort and cost and appealing to those who prefer to work within the system-among others.

"Those who enjoy or profit from the exercise of monopoly of power, specifically in credit union supervision and the provision of share insurance, would favor this choice because it least threatens their power and revenue," noted Ely.

Another choice is a separate federal insurance coverage for state-chartered credit unions not administered by the NCUA. It would eliminate the overhead transfer cost and could be created with the 1% deposit federally insured state- chartered credit unions have placed with NCUSIF as well as their share of NCUSIF's retained earnings, he suggested.

A third option is to permit state-chartered credit unions to switch to FDIC insurance while permitting banks and thrifts to switch to NCUSIF coverage, Ely said. "There would be violent opposition from the banks unless credit unions were subjected to taxation and CRA (Community Reinvestment Act)," he added.

The fourth option and Ely's favorite is to broaden the availability of private share insurance for state-chartered credit unions.

"I'm a great advocate of private share insurance," Ely said. "I want to privatize everything. But the problem that private share insurance has is the so-called tall trees problem, which I keep emphasizing."

Tall trees, or very large financial institutions, take everyone else with them if they fail, Ely explained. Currently, tall trees are a very serious issue at the FDIC with regard to the biggest banks and what could happen if they failed, leading to pressure to merge the bank insurance fund with the savings association insurance fund, Ely related.

Prediction: Funds Merger

"When we see deposit insurance reform legislation, which I think we will in the next couple of years, it's a given that different funds will be merged," he said. "There is almost no opposition to it. That's one of the few things we can count on happening."

As deposit insurance reform proceeds with banks and thrifts, it's not inconceivable that credit unions will get pulled into it, Ely stated.

"The credit union movement, up to this date and time, has wanted to stay as far away from it as possible," he noted of insurance reform. "But if they want to do something in the federal area, such as splitting up the NCUSIF or giving credit unions the option of switching to FDIC insurance, well, it gets pulled into the same bill and it gets really messy."

Ely said he considers his last option the least realistic: dropping share insurance altogether. "The federal government and the state government, and governors and legislators in particular, are saying they don't want depositors taking risks, we want to protect them," Ely noted. "That is a very broad sentiment."

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