Rise in Deposit Coverage Levels Risks A Hike in Share Insurance Premiums
WASHINGTON -- What's good for credit unions and their members in the short term could necessitate paying a premium in the future.
Deposits on all accounts are insured up to $250,000 through the end of 2009, without any increase in contributions from credit unions. But the sluggish economy has caused more credit unions to close this year than last year, and the fund could be liable for more money since federally insured dollar figures have increased.
When Congress approved the temporary coverage hike, it also approved an increased line of credit for the NCUSIF with the Treasury Department.
When deposits were covered up to $100,000, about 89% of all credit union deposits were insured. The NCUA hasn't released data on how much that figure will grow under the higher coverage amount.
CUNA Chief Economist Bill Hampel said there would have to be a lot of credit unions with large amounts of deposits being liquidated for the share insurance fund to be badly hurt.
"Unless there are lots of credit unions with many $250,000 accounts, the effect on the fund would be negligible, even if liquidations continue at the current rate," he said.
NAFCU Chief Economist Tun Wai advocated that the benefits of increasing insurance coverage outweigh the risks. "You are expanding the safety net and the increase affords members a level of comfort because they know they won't lose their money," he said. "Even if increasing coverage requires more money, it would be small and worthwhile."
The NCUA has closed 13 credit unions this year, of those six have been liquidated, meaning the share insurance fund has had to pay members. The remaining seven were absorbed by other credit unions. Through August, the fund had paid out $36 million, compared with $23.7 million during the first eight months of 2007.
Congress will revisit the issue of deposit insurance coverage limits next year. Several lawmakers have said that they will evaluate the economic conditions before determining whether to make the change permanent.
If Congress decides to make the $250,000 coverage level permanent that could cause the NCUA to raise the amount credit unions pay for deposit insurance because it would be too costly to have taxpayers be potentially liable for the additional costs.
NCUA Chairman Michael E. Fryzel said that he doesn't want to raise premiums but doesn't rule it out in the future based on changes in the health of the fund and economic conditions.
Federally insured credit unions must maintain a 1% deposit in the NCUSIF based on the total amount of insured shares and deposits in the credit union and could be required to pay an additional assessment.
The Bush administration announced last week that the FDIC would insure all deposits, regardless of size, in banks' noninterest-bearing business accounts. Credit unions were not included when the proposal was unveiled and the NCUA, CUNA and NAFCU have been working to persuade the Treasury Department to give credit unions parity.
Those accounts should "have the same full insurance coverage through the NCUSIF," CUNA said in a statement.
NAFCU President Fred Becker wrote Treasury Secretary Henry Paulson a letter in which he urged the department "to provide a similar benefit to credit unions as we do not want to see credit unions disadvantaged." Becker expressed concern that credit union members might move their business accounts to banks if parity was not provided.