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:

  1. 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.
  2. 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.
  3. 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!

Randy Gunderson

No biography available for this author.

8 Responses

  1. Skip says:

    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.

  2. Robbie Wright says:

    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!

  3. Randy says:

    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

  4. Randy says:

    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

  5. Skip says:

    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.

  6. Ron Bensley, Jr. says:

    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.

  7. Anon says:

    ASI (private insurance) has a great deal of risk in the Credit Unions they insure. For instance, they insure about 12b in assets and 1/2 of those assets are in Nevada and California. Anyone who knows anything about the losses in those states has to know that ASI has a tremendous amount of concentration risk. This insurance fund in my opinion is a ticking time bomb for failure and this is why NCUA is not comfortable.

  8. Bill Hayes says:

    We pay a good deal of attention to the status of both the Federally-insured insurance fund, the National Credit Union Share Insurance Fund (NCUSIF), which insures the first $250,000 of each of our members’ deposits, and the private insurance fund, insured by American Share Insurance, which insures members’ deposits in excess of $250,000. To get an update on how the private fund is doing, you can go to http://www.americanshare.com and read the July, 2009 newsletter.

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