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Follow-Up on Credit Unions Converting from Federal to Private Insurance

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In my last week's post about credit unions converting from federal to private insurance there were questions about whether members would be allowed to make a penalty-free early withdrawal before such conversions. After some help from readers, I found the NCUA rules which deal with this issue. According to the NCUA's Manual on Credit Union mergers:
Part 708b.203 of NCUA's Rules and Regulations describes our procedures and notice requirements for federally-insured, state-chartered credit unions to convert to private insurance if all the following conditions are met:
  • State law permits private share insurance.
  • Regional Director approves the conversion.
  • Affirmative vote of the majority of the credit union's members who vote on the proposition, provided at least 20 percent of the total membership participates in the voting.

If the conversion is approved, the credit union is required to allow members to be able to withdraw their money without an early withdrawal penalty. Here is what is stated in the NCUA manual:
The credit union will, at any time before the effective date of conversion, permit all members who have share certificates or other term accounts to close the federally-insured portion of those accounts without an early withdrawal penalty.

At the bottom of last week's post I included a poll asking readers if they would join a credit union that only has ASI (private) insurance. Out of 528 votes, 90% voted NO to this question.

It'll be interesting to see how the vote goes at Velocity Credit Union. I know of another Texas credit union that tried to convert to private insurance in 2007, and the members rejected the conversion. After last year's financial crisis, I would think concerns over private deposit insurance would have only increased.


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7 Comments.
Comment #1 by Anonymous posted on
Anonymous
So here is the scenario:

CU gets private insurance
Private insurance goes under
Everyone is shocked
Fed steps in to save the day
Taxpayers once again get hosed

Only a fool would belong to any institution with private insurance.

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Comment #2 by Anonymous posted on
Anonymous
You must be talking about American Share Insurance. ASI was panned by the GAO years ago for being at risk. This was the result of being over-concentrated in several huge California state chartered thrifts. That's changed a bit since mega-thrift Patelco reverted to federal insurance several years ago. However, notwithstanding ASI's claims, this insurer is still heavily underfunded. Moreover its regulator is the Ohio Dept. of Insurance which is not even a bank regulatory agency.

With the federal deposit insurance ceiling currently at $250k, it would be irrational for a depositor to keep funds in an ASI-insured thrift.

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Comment #3 by Anonymous posted on
Anonymous
Obviously those that are "Pro" federal insurance have not paid to close attention to what is going on in DC....$12Tillion reason why Federal insurance is bad...How many times have the Feds gone to their member institutions and asked for a premium/assessment/bailout? 3 and planning on many more over the years to come...Their own words...Assessments/premiums are planned for each of the next 6 years....Has ASI ever needed a bailout? NO...Who is the fool? The tax payers are in fact getting hosed by the FEDS...poorly run organizations that monitor Federally insured insitutions... Government backed means government controlled... In America we are for allowing choice...Everyone is for that choice unless you disagree with their choice...Time after time private industry has shown we can do it better than the governement, so why should everyone be the same and get on to a path that leads to further instability? The Governement backs each individual for $250K at each institution... A private insurer insures for much more, they insure $250K per account type/suffic...For those that have a lot of money to save they definitley allow an individual to find the BEST institution and and place their money their and be secure in it....The funny part about this discussion is you need to be more concerned with the institution more than the insurer... ASI is more heavily regulated and watched than the NCUA...Ohio and all states they insure credit unions in examin them each year from what I understand....How often does any one examine what the Government does??? How about never.... Why do you think the Big Corporate Credit Unions failed, which by the way are insured by the Federal Governement and they allowed them to invest in mortgage backed sucurities and sub mortgages...How smart is that...I do not believe that ASI insures Corporates, sounds smart to me....I would say you would be a fool to allow a monopoly in this area or any other area...Our own government have said monoplies are wrong, so why would anyone want one in such an important area?

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Comment #4 by Anonymous posted on
Anonymous
Hey Mr.Banker!

Do you really know what you are talking about? Are you aware that the fund you reference in Rhode Island not only insured Credit Unions, but insured banks also? Are you aware that the biggest issue with that fund were the banks not the Credit Unions? Compare apples to apples...Not apples to oranges.... Your fears should not be spread to everyone... Using your own reasoning, since GM is government owned/backed, should we all rush out and buy General Motors Cars... Even though it is a less quality vehicle??? Is that the car you buy and wholed heartily recommend? Is there any other insurance that you own "Government" supported/backed? NO, aren't those coverages even more important than the insurance on your money? Make sure before you spread your fears/opinions to others you understand what you are talking about....But again, I guess if you can believe after all that has happened with all the bailouts that the government truly understands the issues, there are bigger issues here....NCUA allowing sub-mortage pools to be invested by Big Corporates...NCUA having examiners on staff at the big corporates and still not seeing the problems....Boy makes me feel real safe, how about you?

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Comment #5 by Anonymous posted on
Anonymous
Look, I am no big fed fan but they will be the last to fall. No one has lost money yet with the fed. Private companies can declare bankruptcy, ie, look at Leahman Bros. Thats why private insurance will never work with any financial institution.

The FDIC and NCUA are not the bad guys. They are the firefighters that come to the rescue!

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Comment #6 by Anonymous posted on
Anonymous
I think that this conversation, so far, represents extreme positions on both sides. How would I vote if I belonged to a credit union planning to convert from Federal to private insurance? NO. But would I join a credit union having only ASI insurance. Depending on the strength of the credit union and the attractiveness of its products, possibly YES. However, I wouldn't put all of my savings in such a credit union, only what I'm prepared to risk a loss, regardless of how improbable that might be. Clearly NCUA insurance, having the full faith and credit of the U.S. Government backing it, is preferable, as the federal government can, in a crunch, rely on the taxpayer! But is there any reason to suppose that ASI is worthless? I don't think so. Why would credit unions pay premiums for an insurance product if they believed it to be worthless? Why would anybody? Yet people purchase many different kinds of insurance for a variety of reasons: hazard insurance, life insurance, health insurance, auto insurance, etc. -- all of which are PRIVATE insurance. If these policies are not worthless, is there any reason to suppose that private deposit insurance is, ipso facto, worthless? No one has ever lost money on a federally insured deposit account; but, so far, no one has ever lost money on an ASI insured deposit account either. Obviously there is some risk associated with private deposit insurance, as the insurance is only as reliable as the health of the insurer, but the fact that the insurance industry is state regulated should provide some degree of confidence (admittedly, less than what one would have with federal insurance). As for the past example of Rhode Island, that may have been specific to that state. It cannot, by itself, be cited as reason to doubt the reliability of ASI. All it means is that it is possible for a private insurer to fail, given sufficient pressures on the insurer's reserves. If you want absolute safety, then place your deposits only with NCUA insured institutions. If you are willing to assume reasonable risks in exchange for the prospect of a better return on your money, then an ASI insured credit union is far from the worst alternative out there.

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Comment #7 by Anonymous posted on
Anonymous
So, Anonymous, at 1:20 PM, September 14, 2009, where do YOU have your money? In an FDIC guaranteed institution, NCUA, or ASI? Or is it just in your mattress?

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