Living in Glass Houses-Dangerously

Last week, Chip Filson discussed why a choice of share insurance is a vital part of the credit union regulatory framework. This week he asks the question why are NAFCU and NCUA trying to mandate NCUSIF insurance? If spokespersons from these two organizations are really concerned about protecting consumers, then there is a much bigger issue closer to home they should act upon first.


Recently senior NCUA executives and board members and NAFCU have been throwing stones at the primary private insurer, ASI. In discussions at CUNA's GAC, communications with the Colorado Commissioner and interviews with the media, NAFCU and NCUA representatives have been quoted questioning the value and stability of private insurance.

This has been done with a goal of mandating NCUSIF insurance for all credit unions. The efforts have even been extended to lobbying the Consumer Federation of America to endorse their position.

No one would argue the right of NCUA or NAFCU or a credit union to advocate NCUA insurance. For many it is an important relationship. The issue arises from their desire to mandate this solution for all credit unions. Therein lies the problem. For in advocating what they believe is a better solution, their efforts could end up eliminating any credit union choice.

Questionable Tactics

But first a caveat about the nature of the discussions. In virtually all of the interviews, the speakers reference the private insurer's problems in Rhode Island in 1991. In doing so they do not address ASI's exemplary track record but rather try to associate it with an unrelated case 12 years ago. An analogy would be to say that the NCUSIF today is in the same position as FSLIC was in 1988. This was just before Congress passed FIRREA which ended the independent existence of both the FSLIC and the Federal Home Loan Bank Board as the combined regulator/insurer of the thrift industry.

These tactics to sow fear and uncertainty by federal regulatory personnel and a credit union trade association to advance their point of view can only raise concern about their motives, let alone the logic of their position. It is important to remember that the last big credit union insurance problem with losses to members was not from a private insurer, but the NCUA's role in Capital Corporate FCU's demise.

Why Mandating NCUSIF Insurance Is a Wrong Policy

Let's follow NCUA/NAFCU's logic in trying to mandate federal insurance and eliminate choice. First, let's postulate that this occurs. Then the unique structure of the NCUSIF with the withdrawable deposit no longer makes sense, the accounting for the 1% deposit as an asset becomes questionable and whatever leverage credit unions hold with NCUA about the use of insurance fund reserves becomes even more tenuous. The fact that choice exists and that a credit union can choose another insurer what provides legitimacy to the whole legal and accounting structure of the NCUSIF.

But let's continue. The only way to mandate federal insurance is to have Congress pass legislation. Legislative vehicles to accomplish this exist. For example, Congress is working on legislation to raise FDIC insurance coverage to $130,000 and to combine the BIF and SAIF funds now managed separately by the FDIC. There is widespread bank and thrift support for the bill. The NCUSIF is not included. So goes the logic, let's get NCUSIF coverage equal to the FDIC and slip in an amendment requiring NCUSIF for all credit unions at the same time.

The Endgame: One Insurer=FDIC

But that is not what would likely happen. State chartered credit unions and their regulators would demand choice. The only option remaining would be FDIC. Congress, which has a lot of other issues to worry about including war and an exploding deficit, would take one look and ask why there are two funds with exactly the same coverage and a potential government liability? Why not have one federal insurer-the FDIC.

Congress' logic would be compelling: the FDIC has the expertise, diversity of insurance risk across three charter types, ten times the assets of the NCUSIF and the history and confidence of the rest of the regulatory community including the Federal Reserve Board. The supporters of one government fund-FDIC- ( and against a choice for credit unions) would use the same arguments that NAFCU and NCUA are using when they say credit unions should not have insurance choice.

Many credit unions would be inclined to support the logic of only FDIC because it would preserve elements of choice not available under an NCUSIF mandate. Moreover for state charters, all of the nagging issues of transfer rates, NCUA salaries, operating fees and NCUA regulatory overreach go away in one fell swoop. NCUA becomes a regulator only, with no role for credit unions opting for FDIC coverage.

The logical endgame of NAFCU and NCUA's position is to mandate FDIC insurance. Congressional staff and the GAO will quickly point out that solution the instant the issue of mandating NCUSIF coverage is raised. CUNA supports choice and that could mean, at a minimum, an FDIC option for state charters. NASCUS would undoubtedly do the same.

Why Throw Stones?

So why are NAFCU and NCUA pushing this issue. Is it fear or greed? Is NCUA really worried about a flight from the NCUSIF?

One can understand NAFCU's need, as a trade association, to create a wedge issue. NAFCU has lost membership through the massive conversions from federal to state charter. With credit union membership only in the hundreds out of almost 6,000 federal charters, they have an enormous credibility problem compared to CUNA's representation of all federal and state credit unions. NAFCU's inability to affect the climate and direction of federal regulatory policy resulting in loss of members has left them only one option-putting everyone under NCUA's sway.

NCUA's motives may be less clear. Why should they worry about conversions to private insurance if they really believe NCUSIF is better? Or is it possible that the accumulated weight of the Agency's expenditures and low interest rate environment are going to cause a premium this year to maintain the 1.2% ratio. (see October 2001, July 2002 articles) Do they want to eliminate options before assessing a premium so credit unions cannot exercise choice?

What NAFCU and NCUA Can Do

We don't know the answer. But if their concern is really genuine about members who are privately insured and therefore have no recourse to the federal treasury, then there is one easy way for them to show their true colors on the core issue-if that is it.

The largest amount of uninsured shares is not with ASI, but in NCUSIF insured credit unions. According to the December 2002 call reports there is $43 billion of shares with no insurance coverage ( that is above the $100,000 per member limit) in 6,201 natural person credit unions. In addition there is $87 billion in the corporate system for a total of $130 billion in funds not in any way covered by the NCUSIF.

Uninsured Shares

The NCUSIF credit unions are not required to make any proactive disclosures about these funds which have no insurance or government backing of any kind. If the NCUA board and NAFCU really believe disclosing the lack of federal backing is important, they can start today with a requirement that members be told these funds "are not federally insured and if the institution fails the federal government does not guarantee that any depositors will get their money back."

If that wording sounds familiar, that is what is disclosed already, every day, to privately insured credit union members.




March 31, 2003


  • Interesting but not acurate
  • I am appalled at the NAFCU/NCUA attempt to railroad state chartered credit unions into federal insurance. I agree with you that we would eventually end up under the FDIC if that came about. Fortunately I live in a state where our regulators have enough common sense to see that a private-insurance alternative is good business. Doesn't this somehow cut at the heart of States' rights by forcing state regulators to accept federal insurance?
  • Bravo! I've let NAFCU know that I didn't support their position on only Federal Deposit Insurance. Gerd Henjes, Pres./CEO Countryside FCU
  • A simplistic and biased view of a complex issue.
  • Good comments from you guys about this issue.
  • This article gives a lot of food for thought. Great job.
  • Excellent !!! Atta Boy Chip ! A very well thought out and reasoned article with tremendous power and insight. You have exposed in a most professional manner the strategic implications of the NAFCU/NCUA positioning. Mike Mastro President/CEO Los Angeles Firemens Credit Union
  • Excellent article.
  • Good thoughts on this issue. Frank Selker, AssetExchange.
  • Always like to hear alternate views of NCUSIF -
  • Great article.
  • It bothers me that this issue is taking center stage in our industry. I have NCUSIF and have ASI for "surplus" deposits. I believe in choice but feel no need to move to private insurance in the near future.
  • Since I am chartered in Missouri, I have no access to ASI (but do use ESI and would convert to private insurance, given that option). In any event, I would be reluctant to join NAFCU given their divisive and short-sighted position on this issue. Rob Givens, Pres/CEO Mazuma CU ($270 million)
  • PREACH ON CHIP! You have said (much more skillfully) what I have been saying for months. All we are asking for is the ability to have a choice. Why does a trade association (and a regulator) want to eliminate choice, other than they are scared that they will lose members/business? D Vogler EVP, Anheuser Busch Employees Credit Union, St Louis, Mo
  • Fascinating analysis of what may be at work in this national debate. Excellent work. Thank you. Karen Johnson President/CEO Point West CU
  • Good article Chip. I agree with all of your points except the issue of NCUSIF disclosing their uninsured shares. ASI, FDIC and all insurers have uninsured shares. Everyone knows that deposit insurence does not cover 100% of deposits. Those of us with NCUSIF are required to have disclosures on new account documents and at every teller station. Limits on deposit insurance is a well know fact and a weak argument aganist NCUA and NAFCU. I believe in choice but stick to your other points, especially the merger with FDIC. It is a real possibility if this debate continues.
  • This article has some very good points. Any thoughts on member's other assets that are privately insured (your home, car, health, life, etc.) For most individuals, these assets are worth far more than their deposits at a credit union.
  • Great article, Chip.
  • Great artilce Chip.