Private Insurance Too Risky, Inadequate for "What If" Situations

I read Mike Welch’s March 12th column “NAFCU Attack on Private Insurance Bad Timing” with interest. He criticizes the NAFCU Board for doing a great disservice to dual chartering and Brian McDonnell, CEO of Navy FCU for insisting that “the game be played his way.” It is a stretch to argue that private insurance is fundamental to the dual chartering system. State-chartered credit unions have flourished in recent years while the growth in privately insured credit unions (absent Patelco) has been small. In fact, the number of privately insured credit unions in this country is about 400 total in the nine states allowing a credit union to be privately insured. Mike’s argument that private insurance is central to dual chartering is at best an overstatement. More importantly, in this case, the real issue is the effectiveness of share insurance. The NCUSIF is backed by the full faith and credit of the U.S. government. It is demonstrably effective. When Alan Greenspan testifies to the unambiguous preference for federal insurance and, using the FDIC as an example, states no private firm could offer equal insurance as cheaply, one must consider what risk is inherent in a private firm’s offering of more insurance for equal or less premium. Of course, everyone is confident that their credit union won’t fail. Nor is there any evidence that any credit union currently insured privately is anything other than safe and sound. Nevertheless, bad things happen occasionally including unrelated events triggering “runs” on shares or deposits, and the public welfare demands that savings be insured. The very broad risk pool of the NCUSIF, and the “full faith and credit” of the federal government behind it, establishes a very high level of confidence in the entire credit union system. Can the same be said for any private insurer? I think not. The private insurance risk pool is small, and with the recent addition of a credit union almost 100 times as large by assets as the average credit union insured privately in 2001, its risk is spread unevenly. Private insurance simply does not enjoy the high level of confidence and security people attribute to federal insurance. Two decades ago over 20 firms provided private share/deposit insurance. That number is greatly reduced today, due in large part I suspect, to the fact that private insurance is a most difficult business proposition. There is a safety and soundness issue here. If multi-billion dollar credit unions can opt for private insurance in the same way as $40 million credit unions, the premiums will either have to rise considerably above those of the NCUSIF or someone is assuming a lot of unpriced risk. It is very probable that all credit unions, privately and federally insured, are and will be assuming that risk. In this case it is not good enough to argue that credit union choice is the more important issue. It simply is not. The NAFCU Board got it right. All credit unions should be insured through the NCUSIF with the banking of the full faith and credit of the United States Government. W.A. Earner Senior Executive Vice President Navy FCU Merrifield, Va.