As thoroughly reported in Credit Union Times, the financial condition of the California-based and recently conserved Cal State 9 Credit Union continues to deteriorate. The National Credit Union Administration's handling of this state-chartered, federally insured institution raises an important public policy question. Is the NCUSIF purposely or inadvertently using conservatorships to make uninsured depositors whole?
Following recent regulator takeovers of distressed credit unions like Cal State 9 and before the purchase and assumption deals have been closed, large outflows of deposits have been observed. These outflows stem largely from those members with deposits in excess of the share insurance coverage.
It is not that unusual for 1% of a credit union's wealthier members to represent as much as 25% of the institution's assets. After a regulator takeover, that money becomes red hot.
Regardless of whether it is good public policy or not, this practice of allowing unrestricted deposit outflows is increasing the burden on all other credit unions because the bailout cost of winding up a failed institution is being shifted from uninsured depositors to the NCUSIF. Those members receiving higher returns from uninsured deposits are supposed to be at risk of losing their principal above the insured amount if their institution goes belly up.
Counterintuitively the NCUSIF insulates these wealthier member-owners from moral hazard and market discipline by stepping in. If these same credit union members were investors in Bear Stearns, many industry pundits would be crying bloody murder if the investor-owners were kept whole by regulators.
For healthy credit unions required to fund the NCUSIF's interventions at Cal State 9 and similar problem situations, the additional costs could mean no dividends on their 1% deposit, or worse–an additional premium assessment, or possibly a call on the healthy credit unions' capital to replenish the insurance fund. As a consequence, it is in everyone's best interest for regulators to handle problem situations quickly, decisively, and with minimal cost.
In most cases, this correspondent is not bashful about criticizing NCUA's and a state regulator's actions or public policy decisions. However, the complexity of managing the rapid outflows of deposits at a conserved credit union like Cal State 9 deserves our respect. Despite the controversial tactics used by regulators, it takes a lot of guts to clean up a mess of that magnitude. Armchair quarterbacking by outside pundits is counterproductive.
Only time will tell whether the decision to insulate large depositors is good public policy. In the meantime, the credit union industry should consider how prepared it is to fund the costs of underwriting this moral hazard.
Marvin Umholtz
President/CEO
Umholtz Strategic Planning & Consulting Services
Olympia, Wash.
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