Who Cares About Deposit Insurance?
I wonder how many depositors really care who insures their deposits or whether their deposits are insured at all
While reading the May 23rd issue of the Credit Union Times, a headline caught my eye. It was titled “Rift Between Federal and Private Deposit Insurance Emerges in Washington State”. First, it’s rare that the Evergreen State is mentioned in the CU Times and second, the article seemed controversial…and I love a good controversy.
The gist of the story is that a number of Washington based credit unions are interested in having another option for deposit insurance besides the NCUA. American Share Insurance (ASI) is interested in providing such insurance, but is getting some pushback from the NCUA. Local bankers’ groups have also taken the position that this may not be the best of ideas.
Here are my thoughts…and I’ll preface this by stating that I’m not too educated on the details of this issue:
- I wonder if the NCUA’s concerns are founded mostly because they are worried for the stability of the credit union system or because they stand to lose business.
- It seems that when bankers take a position regarding a credit union issue, it’s generally a position that hurts, not strengthens credit unions. This makes me wonder if the idea of an alternative to the NCUA for deposit insurance is a good idea simply based on that.
- I wonder how many depositors really care who insures their deposits or whether their deposits are insured at all. The vast majority of my personal wealth is in non-insured financial instruments, and I’m ok with that.
I’m curious to know what others think about this…especially observation #3. If you want to give me some education, I’ll take that too!
Skip on June 8th, 2007 at 12:16 PM
I care about this. I’m a customer of a major California credit union and love them for loan products, but they are privately insured via ASI and I no longer keep money in deposit accounts with them. First, they are actively involved in issuing mortgages in California, but to what extent that portfolio is healthy, I have no idea. Second, they do not offer a decent interest bearing checking or savings account for amounts less than around $10k. If I’m going to put $10k into an account that’s privately insured, I need some kind of risk premium for my money, the same as I would expect to get more out of a bond with a lower credit rating. I love my credit union for loans, but my deposits are going elsewhere.
Robbie Wright on June 8th, 2007 at 12:29 PM
I know a lot of our members like the NCUA insurance and it is actually a big deal for a lot of people. I think us (CU employees) are a little skewed and so close to the products so we don’t mind taking risk in uninsured deposits.
And it seems your feed is acting up slightly. I’m using Google Reader and it got all garbled. Love the new site!
Randy on June 8th, 2007 at 03:17 PM
Skip, Thank you for your comment. That’s an interesting point about risk premium…I’ve never thought of it that way but it makes sense. If your ASI insured credit union paid a market rate for deposits, would you give them serious consideration even though they do not offer NCUA insurance? Randy
Randy on June 8th, 2007 at 03:21 PM
Robbie, Thank you for your comment. You may be right about the volume of members who care about deopsit insurance. Verity started offering excess insurance (through ASI) several years ago and have seen deposit balances > $100k move up considerably.
Randy
Skip on June 10th, 2007 at 08:19 AM
Randy, Yes, I would love to keep money on deposit with them if they had a competitive rate on smaller balances (over $1k maybe?), but would still take issue with buying jumbo CDs or having too much cash there, unless the rates were truly exceptional on an ongoing basis.
Ron Bensley, Jr. on June 10th, 2007 at 08:31 PM
Randy: As I wrote a couple of weeks ago at Bruen’s Blog, a key audience has been missing from this CU industry dialogue: rank-and-file credit union members. How many credit unions have brought up the topic of privatized deposit insurance in their quarterly newsletters, on their website, or at their annual membership meetings?
Privately-insured CUs may be able to put more money into members’ jeans in the form of higher share dividends and lower loan rates. But rank-and-file members should be discussing this, just like investors often discuss corporate governance issues at companies they own stock in and almost everybody has their opinions about economic issues affecting their pocketbooks. Good arguments can be made in favor of private non-governmental insurance, particularly the “moral hazard” it presents for risky lending and business practices. Good arguments can also be made in favor of having the “full faith and credit of the United States” behind the insurance.
My educated hunch, based on Internet-based social media’s emerging impact on business practices and politics, is that a CU might encounter far more resistance among some of their member/owners than they expect. John Q. Public may well be extremely distrustful of private deposit insurance, particularly if other CUs or banks run publicity campaigns cynically aimed at a CU’s membership touting that they ARE Federally insured.
A CU’s leadership team attempting to switch to private deposit insurance could “win the battle” but ultimately “lose the war”. At this time, I’m unconvinced that CU members are really seeking this kind of “reform”. My three pennies’ worth.