Fight for Private Primary Deposit Insurance in Washington State a Long One Either Way
OLYMPIA, Wash. -- The Washington State Department of Financial Institutions was holding a stakeholders' meeting last week when Credit Union Times went to press to gather further comments on its proposal to permit state chartered credit unions there to use private primary deposit insurance.
The May 30 meeting marked more than a year of working on the proposal, which still has to go back to the legislature before it is finalized, according to Washington Credit Union League President/CEO John Annaloro. Washington has a "deliberative process," he acknowledged, but they are accustomed to it and it should not be a problem to once again permit private primary deposit insurance in Washington State.
"The regulation will become finalized," Annaloro forecast. "This is a tremendously long process." He noted that it will be mid-2009 at the earliest before the first credit union could obtain private insurance.
In the meantime the Washington league has been monitoring the issue and three staffers were attending the stakeholders' meeting. The league submitted its most recent comment letter on the latest draft of Alternative Share Insurance Regulations May 25, which stated, "The League supports the DCU's decision to require applicants to provide information acceptable to the director, and granting the DCU regulatory discretion over the approval of a new share insurance provider. Formulaic standards that lack regulatory discretion will not result in the best assurance of consumer safety."
This support for the regulator's judgment on private insurance applicants stands in sharp contrast with a letter from John L. Bley of Foster Pepper on behalf of the Washington Bankers Association and the Washington Independent Community Bankers Association, which said "the proposed rules as drafted to date continue to fall precipitously short of legislative intent in many respects." Bley, a former state regulator, oversaw the closing of the former private insurance company in Washington State.
As this new system starts up, however, the league said that this greater flexibility for the regulator "will allow and require alternative share insurance providers to be viable over the long term. As credit unions continue to evolve to meet the changing needs of consumers, and as the private share insurance market in Washington develops, additional measures of safety and soundness may emerge." Additionally, providing the option of insurance different from the NCUSIF is good for competition, the association wrote.
In addition the WCUL letter, signed by Director of Regulatory Affairs Mary Sroufe, read, "A credit union that is insured by alternative share insurance will be subject to greater local control including legislative and regulatory controls. This will also enable Washington credit unions to be more responsive to the needs of their members. Increasingly over the years, and particularly since the passage of the USA PATRIOT Act, control over local financial institutions has been eroded in a continued shift toward federalism."
On the other hand, Bley's letter questioned three material areas of the regulation, including the adequacy of reserves, national geographic diversity, and confidentiality. Similar to NCUA's letter, the banking groups' letter challenged the sufficiency of the stress tests performed on American Share Insurance, the only private primary deposit insurer in the country. The letter even cites an NCUA report to Congress, "Study of Further Possible Changes to the Deposit Insurance System" from February 2007, where NCUA expresses concern over its risk concentration following the conversion of $3.3 billion Patelco Credit Union.
ASI is the only competitor for primary deposit insurance with the NCUSIF, as administered by NCUA, and can only function in a handful of states. The NCUA Board also previously commented in the Washington State deliberations.
The bankers' letter also noted that the Colorado Commissioner rejected private insurance in that state as "not comparable" to NCUSIF coverage.
Also, Bley said, "We recommend that the term 'share insurance contract' be redefined in the rules to take into consideration the risk each one of those contracts have to the fund by taking into account the volume of the primary insured deposits covered by each share insurance contract."
He added, "To us, it is self-evident that the purpose of the geographic diversity requirement is to assure that applicants whose fund risk is not sufficiently spread out among geographic regions not be allowed to serve credit union members in our state."
Finally, the confidentiality of application information is too broad and eliminates transparency in the process, Bley wrote. "We have no objection to maintaining the confidentiality of personal financial, business plans and other proprietary business information," he continued. "We also note that the rules directly applicable to credit unions already exempt that information from public inspection. However, to declare all aspects of an application protected as examination information is overly broad and would have the effect of prohibiting public oversight of the application process." Also, it would negate the public hearing requirement in the statute.
The bankers' letter concluded, "It appears to us that the rules from the outset have been designed to legitimize an application for private deposit insurance rather than to evaluate it."
Annaloro argued that while the Washington State credit union regulatory environment is one of the most liberal, it is a "carefully considered environment for financial institutions...It's quite progressive but keeping in the regulatory framework as the bank charter is very progressive as well."
Despite the naysayers, ASI President Dennis Adams said, "My prognosis is its moving down a very favorable path." The agency is performing a very thorough review, he said, adding, "I'm encouraged by their actions and what seems to be genuine interest."