Reviving the Dual-Chartering System

I think that if you took the pulse of credit unions today you would discover two feelings: worry over the growing authority of the NCUA; and a desire for more regulatory flexibility than now exists under the charter options.


I think that if you took the pulse of credit unions today you would discover two feelings: worry over the growing authority of the NCUA; and a desire for more regulatory flexibility than now exists under the charter options. Both lead to a path that wrenches credit unions out of the present system into other charters, including bank charters.

The best remedy to this climate is a vigorous dual-chartering system; that is, both a vibrant federal chartering option and a vibrant state-chartering, non-federal insurance option, this latter of which is presently missing.

The pendulum has been swinging to ever greater and intrusive federal authority. H. R. 1151 has been a motivator. To be sure, this is a gray area, but NCUA under the banner of "safety and soundness" can just about sweep into any federally-chartered credit union or federally-insured credit union, or take all of the NCUSIF funds and use them in any way it sees fit, for the better promotion of "safety and soundness."

Moreover, quite a number of credit unions feel constrained under current regulations concerning business lending, expanding FOMs and the like. They want a chartering climate that is more flexible and responsive. They do not want to surrender all of the positive qualities of being credit unions, but they are very seriously looking at banking charters.

The remedy for these credit unions is an option of effective state charters with effective private insurance.

Even champions of federal charters and federal insurance should recognize that a vibrant dual-chartering system is good for everyone. Federal charters and federal insurance may be just fine for some credit unions. But danger grows if there is only one option. Such a climate breeds bureaucracy, lazy thinking, inefficiency, even tyranny and stupidity. Vibrant competition breeds leaner organizations, efficiency and creative thinking.

You're saying to yourself, "But haven't we tried this, and didn't it fail?"

No, we never really tried it and No, it didn't really fail. It didn't really fail because wherever states closed down private insurance, it was banks that were the problem, not credit unions, which just happened to get caught in the tide. Moreover, states became too small for private insurance. Institutions insured within individual states could not have the diversity or the growth opportunities that could allow for a healthy insurance fund. Such a successful insurance fund has to be multi-state. Look to ASI; it is multi-state and its loss rate is 1/10 that of the NCUSIF.


A lot of people are going to resist this notion. The federal system is a good deal for a federal credit union. The supervision fees are low because of 50% transfer rate, favoring federal over state credit unions. There is only one examiner and one master now; would a federal credit union want to risk two examiners and two masters if it retained federal insurance and opted for a state charter? The devil you know is better than the one you don't know.

But the inertia may very well lead to ossification of the system. Presently, the dominance of the federal option rewards federal credit unions at the expense of state-chartered ones, the transfer rate being one example. And more and more, people willingly or silently kowtow to the federal line. They acquiesce to NCUA's expensive headquarters, to eye-popping salary increases and similar spending, either because they do not think through NCUA actions or because they fear complaining against an organization that sends examiners into their offices.

Why Now?

This is not a plea to get everyone to quit federal charters. This is a plea to re-establish a viable, vibrant dual-chartering system, because it will be good for everyone, and because without it, more and more credit unions will be tempted to turn to banking charters to get the flexibility and responsiveness they want.

Why press for this now? For one, times are good. Fix the roof while the sun is shining and before the rain comes. Times are stable, so now is when we should be launching the effort.

In addition, the FDIC is likely to go to Congress and ask for the capacity to insure deposits to $200,000. Bankers will support the move so long as they can get Congress to call for a cap on the FDIC (now open-ended on its growth), the better to start a schedule of rebates. All this is going to muddy the financial waters, the better for us to reinvigorate the dual-chartering system now.

The NCUA may have its own moves waiting in the wings: raising the premium, raising the transfer rate, restricting the rights of withdrawal or adding red tape to the process of withdrawals.

Last reason: The NCUA wants to build the NCUSIF to 1.5% of deposits from the current 1.3%. The more credit unions that move to private insurance, the easier for the NCUSIF to achieve that goal.

All these are good reasons for acting right away.

One last thing: What about the people who say they have to have that "federally insured" sticker on the door? To this I say, members have clearly shown over the last 15 years that they can move much of their assets into non-insured products. And, by virtue of successful cap insurance, it has been shown that insurance does not have to be federal. And remember that the move to federal insurance was not because we needed it in place of private insurance so much as to quell the S&L marketing slander that credit unions were "not insured," meaning not "federally insured."

Therefore, let us put our heads together. We could make a private insurance option much bigger and better than ever existed in the past and in the fragmented state-by-state apparatus. We would need some large credit unions to make the move together, at the same time.

We could make it work. And it would be the better for everyone.




Sept. 11, 2000



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