This is the fourth in a series of articles that look at the evolution of deposit insurance in America. Last month looked at private deposit insurance, this article presents an overview of deposit insurance in America, with an emphasis on American Share Insurance (ASI).
American Share Insurance is in a class by itself. The company, which insures deposits for credit unions, has been in business more than 40 years. That alone makes them unique. While at one time they faced competition, they outlasted them all. They are the only company providing this coverage. Their philosophy from the beginning was simple, credit unions should be able to meet the needs of their members without undue outside interference in daily operations. ASI emphasizes that it is an insurer and not a regulator. They aren’t keen on meddling, that’s a job for individual state credit union authorities.
What else makes ASI stand out? It is a credit-owned share insurance fund with a board of directors and advisory council that is made up of president and CEOs of its member credit unions. The thinking behind that is to ensure that membership has a voice in ASI. It is also licensed by the Ohio Department of Insurance and regulated by the Ohio Departments of Insurance and Commerce, as well as supervised by credit union regulators in the states where it operates. While other private deposit insurers have failed, ASI touts its history of low loss ratios and high equity levels. No member has ever lost money in an American Share-insured credit union account. This is especially noteworthy since ASI has no government backing.
So how did ASI get started? Thanks, goes to credit union pioneer Louise McCarren Herring. The company had another name. It was founded as the Ohio Credit Union Shareholder Guaranty Association (OCUSGA) in 1974, by McCarren Herring and a handful of other credit union enthusiasts. According to ASI company history, it was set up as a "credit union-owned, private sector alternative to federal share insurance, which was first enabled under federal law in 1971. Nationwide, the idea of an alternative to federal share insurance was taking hold.”
But there were a lot of naysayers. For one thing, just by the nature of how the private sector functioned, it was plagued with a lack of diversity, which is a deadly sin in all things financial. Lack of diversity of course increased risks. No wonder so many private insurers eventually failed.
In 2007 the National Credit Union Association submitted to Congress, “Study of Further Possible Changed to the Deposit Insurance System,” the NCUA noted, “A significant problem inherent with private deposit insurance programs is the inability to achieve sufficient diversification. The consolidation within the financial services industry makes achieving sufficient diversification difficult. This leads to geographic and concentration risk."
Critics also claimed that private insurers did not satisfy the public policy goal of maintaining confidence and stability in the financial system and economy. According to the report, “history shows when private insurers fail, depositors at other privately insured institutions, even if those institutions are healthy, lose confidence in their institutions as news of the failures spread. This risk of contagion increases withdrawal rates at all privately-insured institutions, contributing to liquidity crises, and can have broad ramifications for the economy.”
The 80s were an interesting time for private insurers. There was deregulation of banking services, and deposit insurance coverage limits increased from $40,000 to $100,000. There was also much re-regulation, and double digit inflation in the early part of the decade was its own monster. The early years were important to OCUSGA. It changed its name to the National Deposit Guaranty Corporation (NDGC) to reflect it was broadening its geographic reach, which would prove to be a key strategy. A year later, it first introduced excess share insurance for credit unions. This covered credit union members exceed the $100,000 federal insurance limits.
The 80s were marked by financial turmoil. The S&L crisis blew a hole in the FSLIC, the thrift deposit insurance fund. Credit unions didn’t escape the decade unscathed. In fact, the financial stress on credit units lead to the closure of lesser-capitalized private share insurers. By the end of the 80s there were a mere 10 funds still in business operating nationally. NDGC was one of only two funds operating in more than one state. When state-level and federal legislation in the late 80s upped regulations, NDGC changed its name to the National Deposit Insurance Corporation (NDIC) to reflect the change that it was now being governed not only by the insurance laws of Ohio.
The more things changed, the more there would be a need for a new name. In 1991 NDIC became ASI. The big news that year though, was the passage of the Federal Deposit Insurance Corporation Improvement Act (FDICIA). For the first time, private share insurance got some respect. According to ASI company history, “private share insurance was recognized for the first time in federal banking statutes, encouraging the continuation of the private share insurance option so long as consumer disclosures explained the private coverage sufficiently.”
Another important year during that decade was 1993. The company created and incorporated Excess Share Insurance (ESI) as a wholly-owned subsidiary of America Share to allow it to serve almost 225 credit unions in 33 state, instead of the 16 it served prior to ESI. By the 1990s, ASI was the sole private depositor insurer for the nation.
Next week’s article will focus on more details about ASI since the 2000s and look at their business model that’s proven to be a winning strategy.
Editor's Note: For details of the current state of deposit insurance coverage, please refer to the article, “Safety of Your Money - Deposit Insurance Coverage Limits.”