For the past
three years there has been an exodus from the federal credit union
system. The trickle is turning into a torrent. While field of membership
is often a precipitating event, the momentum is about a bigger issue:
the responsiveness of the credit union charter in an era of extraordinarily
More and more credit unions are looking not just to state charters,
but outside the credit union system for opportunity. Changing charters
for FOM flexibility is only part of the constraint. The major concern
is the unlimited reach of the NCUSIF insurance authority. Without
a change to cooperative insurance or change of a new charter, NCUA
through its insuring power, still sets critical limits on the evolution
of every NCUSIF insured credit union.
Credit unions in 1984 changed the face of federal insurance by creating
the first federally managed fund that grew at the same pace as the
insurance risk. The 1% deposit plan not only capitalized the fund
but established a system that relied on self-help, not governmental
bailouts, for solution to any system crisis.
The NCUSIF, using the model of the state based credit union share
insurers, has worked better than any other federal fund. Both the
FSLIC and FDIC required Congressional action to maintain those fund's
commitments to their depositors. The NCUSIF came through this same
period without a single glitch. The NCUSIF never sought or received
any public assistance; whereas the American public is still paying
for the thrift/FSLIC problems.
In the last five years when losses to all three federal funds have
been minimal, the NCUSIF has still proved to be a superior system.
For instead of hoarding capital, the fund, as required by law, has
paid dividends of over $500 million to the Fund's credit union owners.
The critical question is whether a fund designed on principles over
20 years old is still the appropriate model for today. Is there
evidence that change is overdue?
of the Prodigal Fund
The extraordinary success of the NCUSIF has produced an extremely
troubling side effect. No insurance losses have been charged to
the P&L for the past five fiscal years. (see
graph 1) However
NCUA has routinely charged 50% and more of its total operating expenses
to the fund. The result is that over $254 million has been charged
to the NCUSIF for "administration" in this same timeframe.
In the FY 2000 budget, these costs are planned at over $60 million.
Since the fund was capitalized in 1985 the amount of NCUA's operating
expenses charged to the fund has risen from $10.8 million to $58.4
million, a 535% increase.
No outside authority approves NCUA's budget. No congressional funds
are used to run the agency, therefore no congressional or executive
control is available. The result is that while the number of federally
insured credit unions has declined by over 7,000 in the past 20
years, the cost of insurance per credit union has risen from $726
in 1985 to $5,494 in 1999, an increase of 756%. These are strictly
the administrative expenses and include no loss provisions for years
in which losses occurred.
The role of the NCUSIF has shifted from funding insurance activities
to underwriting the operating costs of the federal charter. In essence,
the state charters are providing a subsidy to the federal system.
The consequences are more than a discussion of accounting transfers
and fairness. Because the NCUA has been exempt from assessing the
full amount of its operations on its charters, it has not been accountable
in the management of its core supervision and examination processes.
The NCUSIF is being used to underwrite outdated cost structures
and business processes that would need to be rethought if the full
cost were being borne by the federal system.
Why look for a better way?
There are at least six reasons.
- The time
to make change is when the system is doing well. Both politicians
and regulators are reluctant to try something new when there is
economic uncertainty. Capital is at an all time high and credit
unions have the capacity to take a new approach.
- Federal insurance
brings federal regulation. Whether the issue is member business
loans, membership shares or capital adequacy both Congress and
the NCUA have used the insurance power to impose their views of
appropriate business practice for all credit unions. To restore
the innovative role of the state charter will require a complete
alternative to the NCUSIF.
- Both the
FDIC and banking lobbies are seeking changes in the FDIC's administration
and coverage. The goal is to merge the BIF and SAIF funds and
seek an expansion of the insured deposit coverage from $100,000
to $200,000. Any change sought by the FDIC in insurance will open
issues for the NCUSIF. Anytime Congress looks at the Fund, changes
could be made which would make it harder for the credit union
owners to exercise their options. For example when HR 1151 was
passed, Congress unilaterally raised the ceiling on the NCUSIF's
size to 1.5% of insured savings versus the prior 1.3%. This change
alone allows NCUA to keep over $600 million more in equity rather
than paying these earnings to the credit union owners.
- The Internet
changes everything. In five years financial services will be dramatically
different. Today the core of the credit union business model operates
at breakeven. That is, if the non-interest income is subtracted
from ROA, then the net income for most credit unions would be
close to $0 or even negative. Federal insurance fosters uniformity
rather than innovation. The key to change is many credit unions
seeking new ways to serve members and sharing that learning with
the movement. The state charters have been the traditional incubators
for credit union breakthroughs.
an effective insurance alternative is the most promising way to
bring responsiveness to the NCUSIF. Competition makes any organization
more attentive when their members have choice. A creative alternative
may be the fastest way that those who wish to remain in the NCUSIF's
orbit can make changes in the Fund.
- It can be
done. There is enough experience with insurance and momentum from
credit unions to underwrite a truly national alternative to the
of the Puzzle
How could a new fund be better structured? A cooperative approach
to insurance would recognize that 95% of the insured institutions
will never need insurance or turnaround help. Moreover there will
be periods when no insured institutions are truly at risk as in
the last five years. The fund's strategy would focus on strengthening
the entire insurance base, not just restoring credit unions with
This would be done by using the Internet and timely reporting to
provide information for both the insurer and insured institutions.
Today data can be collected and displayed for hundreds of institutions
in minutes rather than the weeks and months that it takes for NCUA
to make data available. There is significant opportunity to create
an information system to help credit unions react faster than any
other organizations to market driven changes.
The new fund would increase insured coverage. Accountability for
the Fund's priorities would be established through limited board
representation. Pricing rebates can be used to both assess risk
and to help enhance the mutual guarantee aspects of a cooperative
The insurance partner could establish flexible capital structures
to recognize both the solvency and the liquidity risks of insurance.
The fund would also be able to use different corporate structures
to manage different parts of the risk.
In sum, credit unions would have an arm's length business partner
whose first priority is the soundness of the whole system through
proactive change and information sharing.
The most important part of change is to find credit unions who are
willing to do the pioneering work of developing the ideal insurance
structure. This team then needs to engage the primary players including
the leagues and state supervisors to describe the benefits of a
new model. Because many different jurisdictions are involved, multiple
action units would need to be formed. Rolling implementations in
different states would have to be accomplished.
Creating an insurance system that would be a more responsive source
of external capital for the credit union system is the primary action
item. However the ultimate issue is the viability of the credit
union charter. As consumers move away from insured products and
traditional banking services become commodities, finding new ways
to deliver value through the cooperative is the most urgent challenge
faced by credit unions. No one has the answer because no one knows
what the multiple solutions will be. Establishing an environment
to facilitate change is the only way to win this challenge. The
key to accomplishing this is a new cooperative insurance model.