Washington State's banking regulator has found a new ally in his fight to banish private deposit insurance for credit unions from his turf: former Rhode Island governor Bruce Sundlun.
Mr. Sundlun, who cleaned up after the collapse of Rhode Island's private insurer in 1991, urged Washington's state lawmakers to require federal insurance for the 76 state-chartered credit unions covered by Washington State Credit Union Guaranty Association or risk a disaster.
"Watching Washington State is like viewing a rerun of an old black-and- white film," an Associated Press story quoted Mr. Sundlun as saying. "The same things are happening here that happened" in Rhode Island.
"The evidence here is the same as it was in other states where failure occurred: no federal insurance; a private insurer that did not have substantial assets; embezzlements; resistance to state banking authority control and regulation of the private insurer and credit unions; (and) strong political lobbying on behalf of the credit unions to prevent federal insurance," he said.
John Bley, director of the Washington Department of Financial Institutions, has spent nearly two years trying to kill private deposit insurance in the state. He called the hearings a turning point in his fight against the state's credit union lobby. A bill that would have mandated federal insurance died earlier this year.
"This is Gettysburg," said Mr. Bley, who is fond of allusions to the Civil War.
But in an interview, Washington Guaranty president Joel G. Edwards said no comparisons can be drawn between the Washington and Rhode Island situations.
For instance, supervision is tougher in Washington than it was in Rhode Island; delinquency isn't as high; and Rhode Island credit unions were more involved in riskier real estate lending.
"I don't think that Washington and Rhode Island are the same," said Mr. Edwards, who has been president of the guarantor since June. "It was an unfortunate disaster that happened in Rhode Island, but in my research I have not seen the same conditions in Washington. It was a crisis that built up over the years."
Washington Guaranty covers about $1.8 billion in deposits, with slightly more than half of that held by four institutions.
Credit unions fund Washington Guaranty with 1% of their insured deposits. But rather than placing money with the company, the institutions keep it on their books and pony up when the insurer takes a hit.
The company has an operating fund of $3.5 million and contingency reserves of about $15 million.
Mr. Edwards pointed out that Washington Guaranty enjoys a solid track record.
But Mr. Bley said he is concerned that the insurer's deposit base is too small and too concentrated to survive the demise of a few large credit unions or many of its smaller members.
The fraud-related failure of Emerald City Credit Union in November illustrated this vulnerability, he said. Cleaning up after the collapse will ultimately cost Washington Guaranty about $4 million, or about a quarter of the contingency reserve.
"If you put the same level of fraud in a $30 million credit union, the contingency fund would have been insolvent," he said.