SAN ANTONIO-At least one person has issued some provocative challenges to credit unions when it comes to their deposit insurance fund.
John Annaloro, president of the Washington CU League, said many of the rules NCUA has in place for the National Credit Union Share Insurance Fund, along with PCA, helped contribute to the losses the fund has seen as the result of both the corporate meltdown and the failure of hundreds of natural-person credit unions.
Speaking to NASCUS' annual meeting, Annaloro said the only reason an even bigger disaster has been avoided is because NCUA developed some "creative interpretations" of its own rules, including effective use of the other "F word," forbearance.
"The NCUSIF withstands systemic shocks very, very poorly," said Annaloro. "Someone keeps changing the definition of what deposit insurance means. There's mission creep here. It has gone from protecting deposits to protecting reputation risk. There is insufficient elasticity in the safety net."
Annaloro added, "Regulators in general are mad at the industry. The industry is mad at the regulators. Our marriage of institutions to the insurance fund is on the rocks. Love needs to return, counseling and changes may be necessary, or maybe we need a fresh start."
The FDIC Model
As part of that fresh start, Annaloro advocated looking at how other countries structure their deposit insurance coverage and that credit unions consider a "switch away" from the 1% on deposit model CUs currently use to fund the NCUSIF in favor of the FDIC model.
Among the other problems that need a fix, according to Annaloro:
• Joint and severe liability in the absence of risk-based capital standards. "It was OK in the day when all CUs were basically savings clubs that didn't do much. But now they are more sophisticated, with downstream operations, and there is an unfair imposition of loss exposure."
• There is no way for the CU community to work together. "There is no advisory, shadow regulatory group. The agency is alone to address issues. The industry criticizes, rather than helps. One of the greatest tragedies of the corporate CU crisis has been the lack of intellectual assistance, empathy for the agency, or volunteered resolution partnerships. No one has been helping with academic solutions."
What's wrong with the 1% system used by credit unions? Many things, according to Annaloro, beginning with the fact that NCUA funds its budget using income from the deposit insurance fund. That's great at present, said Annaloro, when the NCUA is generating approximately $220 million in investment income to fund its $200-million budget. But due to changes in the investment structure, some are projecting investment income could drop to $100 million annually in coming years, which will create a deficit and require that credit unions not only keep 1% of deposits with the NCUSIF, but pay an annual premium, as well.
Annaloro said that if a CU is to be protected "enterprise wide" by the insurance fund, then the assessment the CU pays should be on total assets, not just deposits, as there are off-balance sheet structures and CUSOs.
"Should it be the case that CUs that are more complex pay more into the insurance fund," Annaloro asked. He noted that the one-time $32-billion WesCorp, just prior to be placed into conservatorship, was paying into the insurance fund based on its insured deposits. "It was the (insurance equivalent) of a $1.2 billion credit union, yet it had 25 times the insurance fund risk."
Annaloro said moving away from the 1% deposit system would also eliminate criticism of "double accounting" and allow CUs to be well-capitalized at 5.25%, rather than the current 7%.
What Is Needed
What's needed for a healthy insurance fund? According to Annaloro, it's:
• Implement an array of capital alternatives.
• Risk-based, internationally accepted capital weighting standards.
• Academic advisory body for regulators.
• Graduate from 1% transfer to expenses premium system for deposit insurance.
• Base DIF costs on total assets of the enterprise.
• Coverage for all deposits without limitations.
"This is our time of opportunity with NCUSIF," said Annaloro. "We need best practices from an industry standpoint, a consumer protection standpoint, and from an industry safety and vitality standpoint. We have shortcomings and we need to fix them.