OLYMPIA, Wash. — American Bankers Association Senior EconomistKeith Leggett has written the Washington State Department ofFinancial Institutions in opposition to its proposal to permitprivate primary deposit insurance for credit unions based on thepublic policy implications of a failure.

“From a public policy perspective, it is important for the DFIto consider the economic disruption that would arise should aprivate primary insurer's reserves prove inadequate and alsowhether taxpayers will be at risk,” he wrote in a letter dated July31.

“History demonstrates that private primary deposit insurers inthe past have lacked the liquidity necessary to withstand a largeconcentration of financial institution failures.” He cited aGovernment Accountability Office report and comment from formerFederal Reserve Board Chairman Alan Greenspan that pointed out therisks of private primary deposit insurance.

Leggett also pointed to the lack of geographic diversification.“Furthermore, sound insurance underwriting practices advocate thediversification of risk. However, private share insurance haslimited geographic diversification, unlike federal depositinsurance,” he wrote. “Only nine states actively authorizestate-chartered credit unions to have private primary shareinsurance. Three states (CA, IL, and NV) account for almost 75percent of insured deposit exposure, and 42 percent of insureddeposits are in California alone. This means a private shareinsurer is highly susceptible to local economic shocks.”

ABA also expressed concern that credit unions could adoptprivate insurance to avoid capital triggers for Prompt CorrectiveAct and the 12.25% business loan cap. “Doing so would allowprivately insured credit unions to engage in riskier activities,while lowering the minimum amount of capital they would be requiredto hold against potential risks, a combustible combination fraughtwith potential for financial disaster,” Leggett stated.

This position creates a strange bedfellow for NAFCU, which hascome out strongly in the past against private primary depositinsurance. NAFCU has not officially commented in Washington yet,but Senior Counsel and Director of Regulatory Affairs Carrie Hunthas said the group plans to submit a letter.

“NAFCU believes that shares backed by federal insurance is thebest means to protect members' savings because it is backed by thefull faith and credit of the United States Government,” she said.“We expect that the regulator in Washington State will consider theABA's comments in addition to the other comments provided to dateas it works through the rulemaking process.”

On the other hand, CUNA has historically been an advocate ofchoice and plans to comment as well, is in line with comments fromthe affiliated Washington Credit Union League, which at theprompting of some member credit unions, has advocated for enablingregulation in this area.

While supportive of the regulatory change to allow for privateprimary deposit insurance, the league has highlighted fourremaining issues it has with the Department of FinancialInstitutions' proposal on private deposit insurance.

First, WCUL President/CEO John Annaloro wrote in a commentletter that there is no reason for a private insurer to seeklicensure from the insurance regulator, as the legislatureentrusted that to DFI in writing the law permitting privateinsurance.

League Wants Due Process

WCUL expressed concern that the regulator can revoke theapproval of an insurance provider without the normal nonpublic dueprocess, including notification and supervisory hearings. “TheLeague has a reasonable worry that a future Director could make anarbitrary or hasty adverse finding based on matters outside ofsafety and soundness or fact. Following the procedures under theproposed rule, before this decision is reviewed and determined tobe unfounded, the damage to the effected credit unions and thestate system as a whole will have already been done,” Annalorowrote.

The league would also like to see tweaks to the provisionsconcerning adequacy of reserves and discounted cries from opponentswith regard to a lack of geographic diversity. “The League'sconcerns derive from both a mathematical or mechanical perspectiveas well as a philosophical or operational one,” Annaloro said.

He continued, “First, it seems that the adequacy of a nonfederalfund's reserves could be best determined by independentprofessional actuaries who are in the business of opining as toreserves and capital.” If the draft stress tests are required inthe final rule, the league asked that loss experience be heavilyweighed in those considerations. The league retained the help ofwell-known Washington, D.C. banking consultant Bert Ely for areport on risk and diversity, which is attached to its letter.

Annaloro added, “By setting standards in the rules that measurediversity based on the entire country, the DFI fails to considerthe fact that unlike federal insurance private share insurance isnot permissible in every state. Also, the draft rules fail torecognize the importance of a fund's underlying riskdiversification based on underlying sponsorship/membership mix.Escalating unemployment within a credit union's membership base canbe more concerning than regional economic risk.”

Though the ABA has now written on the issue in Washington, theWashington Bankers Association and the Washington IndependentBankers Association appear fed up with what they perceive as theregulator ignoring their comments throughout the process. “We hadanticipated this process to be deliberative,” the groups wrote. “Wehad expected this process to be a fair exchange of ideas. It hasbeen neither. It appears that extending the process has provided noadded value. We see little reason to continue to participate in aprocess that rings hollow unless there are material processimprovements. Please respond to our issues in a thoughtful anddeliberative manner. We have afforded you that courtesy, we expectthe same.”

However, on the flip side interested credit unions are pushingthrough. Woodstone Credit Union President/CEO Susan Streifelpointed out that American Share Insurance, the sole private primarydeposit insurer, has been in business for 30 years with no lossesor unpaid claims. “Is it possible to use this company as abenchmark to 'test' the rules?” she asked.

ASI President/CEO Dennis Adams also challenged the stress tests“suggested by the NCUA that were developed over 10 years ago basedon irrelevant outdated information and the application ofimpractical loss exposure assumptions.” He pointed out that thestress tests place the emphasis on larger credit unions while mostlosses actually occur–for both NCUA and ASI–at smaller creditunions. ASI also sought to adjust many of the definitions in thedraft proposal, including “access to additional sources of funds,”“reserves” which ASI said it fails to define, “failure,” “recover,”and a number of others.

School Employees Credit Union of Washington's Sandra Kurackwrote in her comment letter, “From the discussions and draft rulesso far, it appears the State would be holding a private company toa higher standard than the NCUSIF; and unintentionally complicatingthe rule such that a private insurer may be unwilling to evenattempt an application.”

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