A Credit Union Drops Federal Deposit Insurance

Access Credit Union in Illinois has dropped its federal deposit insurance. The deposit insurance has been replaced with private deposit insurance from American Share Insurance (ASI). I learned of this change from the ASI website where it announced the news:

ASI Welcomes Access Credit Union to Deposit Insurance Fund
ASI is pleased to announce Access Credit Union (Illinois) is now a member of the ASI deposit insurance fund. Following the completion of a successful member voting process and subsequent approval by the NCUA, all deposits and shares at the $54M asset credit union are insured by ASI effective January 31, 2014. ASI welcomes Access Credit Union to its primary insurance program!

I first mentioned the possibility of your credit union dropping federal deposit insurance in this 2009 blog post. Fortunately, you don’t have to worry about this change for most credit unions. For credit unions where this is possible, the change can’t be done quickly.

For those not familiar with credit unions, federal deposit insurance is provided by the NCUA. This name is short for the National Credit Union Administration. It's an agency of the federal government, and it administers the National Credit Union Share Insurance Fund (NCUSIF). This is similar to the FDIC which insures deposits at banks. Like the FDIC, the NCUA is backed by the U.S. government. In wording similar to the FDIC, the NCUA states that "the Share Insurance Fund is backed by the full faith and credit of the United States Government."

Not all credit unions can change to private deposit insurance. First, only state-chartered credit unions can drop federal insurance. All federal credit unions (with federal in their names) must be federally insured by the NCUA. For state-chartered credit unions, only nine states allow their credit unions to have only private deposit insurance. These include:

• Alabama
• California
• Idaho
• Illinois
• Indiana
• Maryland
• Nevada
• Ohio
• Texas

When the management and board of directors of a credit union decide to drop federal deposit insurance, they have to put it on a ballot and get the approval of their members. This should prevent a quick change, but it probably doesn’t create a major hurdle for the credit union management. If the board and management all push for the change, many members will likely agree to it without really studying the issue.

If the conversion is approved, the credit union is required to allow members to be able to withdraw their money from CDs without an early withdrawal penalty. I have more details about these requirements in this blog post.

About the safety and soundness of private deposit insurance provided by ASI, there isn’t a simple answer. I reviewed some of the issues and risks in this blog post.