Paul Gentile's Aug. 28 column on private insurance admonishes credit union leaders to “cut out the politics and look at the real issue.” On this point I believe Paul is right, since that has been NAFCU's aim all along in advocating that every credit union, regardless of charter type, be federally insured.

We did not come to that decision lightly, nor has it been especially popular. And if we were concerned about “politics,” we certainly could have taken a much easier road–one that avoided the bumps from critics who say we are meddling where we ought not to be. But for us, the “real issue” boils down to safety and soundness and the integrity of our industry. NAFCU believes America's credit union members deserve to have the safest possible coverage for their deposits, and only a federal deposit insurance system can provide that.

The NAFCU Board takes its responsibilities very seriously. We must not only represent the views of our members, but we also have an obligation to take an industry leadership role, which at times results in our taking what might be unpopular positions. With the private insurance issue, that certainly has been the case.

However, NAFCU is by no means a voice in the wilderness. There are many who support the idea of requiring all primary share accounts be backed by the full faith and credit of the U.S. government. Funny thing is, though, once you've accepted that premise, it leads to only one logical conclusion: only the NCUSIF has the backing of the U.S. government. No private insurer can guarantee that level of safety. Furthermore, as recent events in the financial markets clearly show, it does not take a catastrophic event to erode depositor confidence. Those who place their money in credit unions, unlike those who invest in stocks, fully expect to receive their deposits upon request up to the insured level.

Four years ago, when Colorado considered whether to permit its state-chartered credit unions to be privately insured, it determined that private insurance is not “comparable” to that provided by the NCUA. Some of the most compelling factors leading to the commissioner's determination included the fact that the NCUSIF is backed by the full faith and credit of the U.S. government, the NCUSIF has the authority to borrow up to $100 million from the U.S. Treasury and up to $5 billion from the NCUA's Central Liquidity Facility, and that the NCUSIF has less single institution concentration and a more broadly diversified geographic risk.

Now, the state of Washington is considering whether to allow its state credit unions to privately insure. The Washington standard is even higher–it requires that private insurance be “equivalent” to NCUSIF coverage rather than “comparable.” In its comment letter to the Washington State Department of Financial Institutions in April, the NCUA Board laid out quite succinctly the risks of private insurance and the reasons why private insurance is not “equivalent” to that provided by the NCUSIF. NCUA said, and we agree, that no private insurer has sufficient reserves to withstand a “catastrophic loss.” For this very reason, the General Accountability Office (GAO) in 2003 questioned primary private deposit insurance's ability to “absorb catastrophic losses.”

As then Federal Reserve Board Chairman Alan Greenspan stated in congressional testimony in April 2002, “deposit insurance was designed…to protect the unsophisticated depositor with limited financial assets from the loss of their modest savings,” and “it is clear that deposit insurance has played a key–at times even critical–role in achieving the stability in…financial markets.” Greenspan stated at a subsequent hearing that “the experience over the years with private insurance has not been impressive…in the past, various types of…insurers found that out to their dismay, and bankruptcy.”

Stated quite simply, there is no private insurance coverage equal to that provided under the federal system, either through the NCUSIF or the Federal Deposit Insurance Corporation. No private insurer has access to additional sources of funds, replenishment or reinsurance that is equal to that of the federal government. That should be cause for alarm.

Let's be clear though, NAFCU has no desire to put an individual insurer out of business, no bone to pick with state regulators, and certainly no vested interest–except as a safety and soundness concern–in the pool of NCUSIF-insured credit unions. We have always supported the dual chartering system; we believe in states' rights and the ability of credit union boards to make decisions in the best interests of their credit unions. That said, we are most interested in viable choices, and in our opinion, private insurance is not one of them.

The inability of a private insurer to withstand significant losses not only carries great risk for privately insured credit unions and their members, but it also threatens the stability, safety and soundness of the majority of credit unions that have federal insurance. Confidence in all credit unions could quickly erode, endangering the integrity of the industry as a whole.

Ensuring the safety and soundness of the nation's depository system is a matter of over-arching concern to the entire credit union community–it cuts across all charter types and impacts all of us. If a privately insured credit union encountered difficulty or faced failure, history shows that it would seek entry into the NCUSIF. In the interim, if any erosion of confidence in the safety of deposits were to result, causing members to withdraw their shares, national press coverage would no doubt ensue, and the entire credit union community would be impacted. Why take that chance if we don't have to?

Requiring federal insurance for all credit unions is a very small price to pay when it comes to guaranteeing the safety of the American consumer's deposits. We believe there is a very good reason why all other U.S. depository institutions are required to have federal deposit insurance. Former Fed Chairman Greenspan said it best: “there is no private insurer substitute for deposit insurance from the government.”

Instant Insights /

Private Insurance: Not a Good 'Choice' and Not 'Equivalent' to Federal Coverage

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