Deposit Insurance: A Private Affair
Private deposit insurance disclosure regulation has finally come to fruition. By law, nonfederally insured credit unions have been required to notify their members that they are not federally insured for just less than two decades, so it's about time the Federal Trade Commission started enforcing it.
A 2003 Government Accountability Office report stated, "Some privately insured credit unions GAO visited did not adequately disclose that these institutions were not federally insured; as a result, depositors at these institutions may not be fully informed that their deposits are not federally insured. For example, in unannounced site visits to 57 privately insured credit unions in Alabama, California, Illinois, Indiana, and Ohio, GAO found that required notices were not posted in 37 percent of the locations."
So finally, in 2010, the Federal Trade Commission has issued a final rule. The current period of financial tumult should have pushed this to the forefront more than two years ago. The type of deposit insurance a financial institution carries should weigh heavily in consumers' decisions on whether or not to park funds there. Depositors should be informed to the extent possible of the benefits and risks, particularly during a period of such uncertainty.
Problems at the $819 million Silver State Schools Credit Union in Las Vegas renewed interest in the issue of private deposit insurance, though the credit union's management and American Share Insurance have said the credit union's financial standing has improved.
NCUA Chairman Debbie Matz issued a statement, readng, "In these uncertain and difficult economic times, consumers should know more about how their money is insured, and should know that the federal deposit insurance provided by the National Credit Union Share Insurance Fund is the best option for credit union members." On the other hand, NAFCU has not come out swinging against private insurance as it has at opportune times in the past.
Stirring up trouble for the privately insured credit unions right now would be a bad idea because of the potential for reputational risk. However, I would think the sheer number, assets and geographic diversity of the federally insured credit unions could smother broader reputational risk if it became necessary. Federally insured credit unions in the states with private insurance, such as the sand states of California and Nevada, could bear the brunt of it should the worst happen. Are credit union PR machines prepared?