ARLINGTON, Va. — In its recently submitted comment letter, NAFCU rallied around the importance of federal deposit insurance and urged Washington State regulators to reject private primary deposit insurance.

“While we recognize that secondary share insurance (i.e., insuring shares above the ceiling provided under federal insurance) provided by private entities is important, NAFCU believes that primary share insurance should only be provided by the Federal government,” NAFCU President/CEO Fred Becker wrote in his Aug. 7 letter.

Without federal backing, he added, “NAFCU believes that primary share insurance coverage provided by private entities is fundamentally flawed and cannot adequately protect American depositors.”

According to Becker, American Share Insurance, the sole surviving private primary deposit insurer for credit unions does not have the backing of the federal government and no reinsurance. “For this very reason, the General Accountability Office in 2003 doubted the ability of a private insurer's ability to 'absorb catastrophic losses'” he wrote. Becker said primary deposit insurance should only be provided by the federal government.

In fact, Becker characterized private insurance as a threat to the dual chartering system, a system that NAFCU said it “fully supports.” He wrote, “Currently, state-chartered credit unions whose shares are insured by the NCUSIF are subject to rigorous safety and soundness regulations promulgated and administered by the NCUA, but still enjoy charter options available to them under state regimes…NAFCU opposes significant alterations to the current dual chartering and supervisory system. An option to maintain primary share insurance with a private insurer is a significant alteration and one that threatens this system.”

ASI President CEO Dennis Adams questioned the germaneness of NAFCU's comments during a regulatory process. “The dual insurance provision is already in the statute,” he pointed out.

Not having read the letter, but upon hearing excerpts, Adams said he saw Becker's remarks as an attack on the state charter as he called from NASCUS' State Summit last week. “It sounds like the misuse of members dues and fees to attack the state charter system,” he stated.

No one from NASCUS was available to comment by deadline.

Demonstrating one of the key differences between the two national credit union trade associations, CUNA has historically been an advocate of choice. The group plans to submit a comment letter to the Washington State Department of Financial Institutions as previously reported, but has not done so yet.

In his arguments against private primary deposit insurance, Becker cited former Federal Reserve Chairman Alan Greenspan commenting that federal insurance has aided stability in the financial markets. Becker also noted that privately insured credit unions are required by law to disclose to depositors that they are not federally insured.

“The significant discrepancy between privately insured and federally insured shares cannot be overstated. As such, NAFCU strongly urges the WDFI to consider these factors in light of the purpose of primary depository insurance: to protect our nation's consumers against devastating loss to their savings,” Becker wrote.

He added that Colorado rejected private primary deposit insurance just four years ago as not “comparable” to federal insurance and Washington's standard is even stricter, using the term “equivalent.”

Adams remarked, “I don't know where you draw the line on equivalency.” He said when you look at examinations, diversity of risk, monitoring, and reassessment powers between ASI and NCUA they are similar. ASI's losses per institution, he asserted, are running less than NCUA's and the equity ratio at ASI is slightly higher. Obviously, ASI does not have the backing of the federal government, Adams acknowledged, but if that were a requirement for equivalency it would make the authority for a private insurance option a moot point.

In an appendix to his letter, Becker said looking at the equity ratio is not a fair comparison for the “proportionately equal” reserving requirement under Washington State law. “Additional factors, such as reinsurance, NCUSIF's ability to borrow $100 million from the U.S. Treasury and up to $5 billion from the NCUA's Central Liquidity Facility,” herwrote, “must be considered to fairly and responsibly compare a private fund to NCUSIF and make the statutorily required determination that the private fund holds “proportionately equal reserves.”

The second requirement in the Washington statute is adequate reserves and equivalent access to funds. Becker pointed out that if the NCUSIF's largest credit union failed, NCUA would have to assess a 0.40% premium to each credit union to restore a 1.2% equity ratio; ASI on the other hand would have to assess member credit unions 3.58% of assets to bring it back up to 1.20%, which would “significantly damage many of the privately insured credit unions' net worth ratios.” Reinsurance should be a minimum requirement, NAFCU argued.

NCUA has also written Washington State opposing state charter access to private primary deposit insurance.

Becker also contends that ASI only provides insurance in eight states with 86% of insured shares in four states–California, Illinois, Nevada, and Ohio–which demonstrates ASI's lack of geographic diversity as required in the law.

In addition, when determining equivalency, NAFCU recommended requiring a system of Prompt Corrective Action similar to NCUA's.

Finally, Becker highlighted that the current proposal in Washington State does not address involuntary termination. Federally insured credit unions are provided due process prior to a final decision to terminate and after the decision is made members are notified immediately and coverage is continued for one year after.

–scooke@cutimes.com

Instant Insights /

Private Insurance Debate Heating Up NAFCU to Washington State: Federal Backing a Must for Primary Deposit Insurance

Related Stories

Recommended For You