You've seen their panicked faces on TV, perhaps even in your community if you live near a branch bank customers lined up all night and around the block to withdraw their life's savings from a bank in trouble or rumored to be in trouble (the latter always leading to the self-fulfilling former).
The latest example, and some analysts are suggesting there are more to come, is IndyMac Bank, which for a while there had a presence at a number of credit union trade shows at which it was pitching its mortgage services. No word on whether Martha & The Vandellas will record a new release of Jimmy Mack, in this case, ?Indy Mac, Indy Mac, when are you coming back??
Often you will hear someone refer to what happened at IndyMac as ?an old-fashioned run on the bank.? But there?s nothing old-fashioned about it, despite the black-and-white images of Depression-era customers jamming lobbies trying to get back ?everything I have,? or even that great optimist George Bailey being driven to jump from a bridge by the insolvency of the old building and loan.
There has been a bank run somewhere in the U.S. in every decade since the creation of the FDIC and the deposit insurance that was supposed to put an end to such panics. In our own generation there has been the S&L fiasco of the 1980s (the FDIC has been hiring back retired veterans of those days) and earlier this decade we saw failures of a few Internet banks (I assume customers lined up next to their PCs).
As reported in our July 21 issue, credit unions around the country have been fielding calls from members concerned about their own savings, which had led to a ream of press releases and website statements and what will no doubt be the lead item in every CU?s August newsletter, all about the safety of accounts.
Credit unions have been getting generally good press in the wake of IndyMac?s tanking, and many have seen an inflow of deposits. But credit unions aren?t immune from panics, as the former Cal State 9 CU proved earlier this year as deposits bled away until it was finally merged into Patelco Credit Union.
All of the media focus so far has been on the FDIC (with some reports taking time to explain what this ?NCUSIF? thing is all about) and its federal backing. The issue that has remained on the sidelines to date has been so-called private share insurance, such as that provided by American Share Insurance (ASI) in Dublin, Ohio, to credit unions in nine states. Space doesn?t permit all the history here, but ASI is the last man standing among private insurers and its business has slowly grown as it stepped out of the shadow of some private insurers that failed, most notably in Rhode Island.
Joining the Idiots
I, by the way, feel a special sensitivity to those worried customers standing in line at IndyMac and elsewhere. In the mid-1980s, I had what amounted to my life?s meager savings in an institution insured by the Ohio Deposit Insurance Corp. One day I drove past customers of another ODIC-insured institution lined up outside a branch. ?Idiots,? I thought to myself. The next day customers of my bank were forming lines?and guess who was right there with them?
This latest round of attention being paid to deposit insurance, however, has had some interesting effects on ASI. ?This has been the period of most interest that I can recall,? reported Dennis Adams, president of ASI.
In this case, the ?interest? is in a product offered by ASI-affiliate ESI, the acronym for excess share insurance, or insurance covering deposits above the $100,000 NCUSIF cap. ESI currently operates in 33 states. One tidbit from the IndyMac failure: it had more than 10,000 customers with deposits above that threshold. ?In this situation we seem to be primarily viewed as a value-added service,? said Adams. ?We had at least 200 to 250 calls, most of them from consumers and most of them about Excess Share Insurance.?
What ASI hasn?t been getting, he said, is calls from consumers worried about the lack of federal backing. ?We just sent a statement to all of our excess-insured that answers questions, and to our ASI-primary insured, where we talk about how to answer questions, what to say. As for people worried about (ASI coverage), I?ve gotten no calls. That?s not to say concern isn?t out there, but we?ve had no calls. It?s not been dramatic. I thought there would be more.?
Three-hundred eighty credit unions offer excess coverage, and Adams reported receiving ?many calls? from CUs seeking to start a program. From time of application, he said it takes between 30 to 45 days to put excess coverage in place, assuming there aren?t any issues. One of the issues American Share has been aggressive in addressing, according to Adams, is the risk in its primary-insured CUs? portfolios.
?We?ve gotten much more involved in studying loan portfolios,? said Adams. ?In January of 07 we really tightened and changed our whole approach to underwriting standards.?
The reason? ?The real estate shift,? answered Adams. ?In 07 and 08 we did more on-site exams than at any time in our history. If we saw a concentration in mortgages we really started intense scrutiny.?
Like some other observers, Adams isn?t expecting IndyMac to be the last institution not coming back. ?This whole thing is not done,? he said. ?We?re going to see more problems in the banking world.?
Frank J. Diekmann can be reached at fdiekmann<at>cujournal.com. (c) 2008 The Credit Union Journal and SourceMedia, Inc. All Rights Reserved. http://www.cujournal.com http://www.sourcemedia.com