This is the second in a series of articles that look at the evolution of deposit insurance in America. Last week looked at the FDIC, this article presents an overview of deposit insurance in America, with an emphasis on the NCUA.
Everybody needs an advocate, somebody looking out for their best interests. Credit unions were created to do just that.
In 1900, the credit union concept crossed the Atlantic to Levis, Quebec, where Alphonse Desjardins organized La Caisse Populaire de Levis. He learned that loan sharks were charging outrageous interest rates. He took matters into his own hands and organized the first credit union in North America to provide affordable credit to working class families. Some 10 years later, he helped a group of Franco-American Catholics in Manchester, New Hampshire, to organize St. Mary’s Cooperative Credit Association, the nation’s first credit union, which opened in 1909.
During the 1920s credit unions flourished. Families needed cars and appliances, they also needed cheap credit to get that stuff. Commercial banks and savings institutions largely shunned doing that type of business so families turned to credit unions. In 1934, President Franklin Delano Roosevelt signed the Federal Credit Union Act into law, creating a national system to charter and supervise federal credit unions. The credit union movement continued its steady growth in the 40s and 50s. By 1960, some 6 million credit union members belonged to more than 10,000 federal credit unions.
Credit union growth brought changes. In 1970, the National Credit Union Administration (NCUA) became an independent federal agency. During that time, Congress established the National Credit Union Share Insurance Fund (NCUSIF) to protect deposits at credit unions. This didn’t happen overnight. In fact, many years previously were spent “experimenting” with nonfederal alternatives, and there was plenty of debate. Just to paint a picture, back in the 50s, state credit union associations sponsored “stabilization programs” where stronger credit unions would assist struggling ones. It’s worth noting too, as detailed in the paper, American Share Insurance: The Sole Surviving Private Insurer in the United States, that CUNA long opposed federal deposit insurance. The fear was that federal regulation would restrict state-chartered credit unions and that insurance would imply that credit unions, like banks, were unsafe.
Unlike banks, deposit insurance for credit unions wasn’t birthed because of financial chaos. Deposits grew rapidly after World War II. From 1949-1965, annual real growth rates of deposits in credit unions were high, ranging from 10-24%, handily besting that of commercial banks. What was key to their success? During the Great Depression, credit unions suffered few runs and only a very small number of their depositors experienced losses. But when credit union deposit growth slowed in the 60s, the conclusion was that deposit insurance made sense and would be a cost-effective benefit to their customers.
The 70s would also be a pivotal time for financial institutions who began to make significant changes to their product mix. Credit unions were not going to be left behind. They in turn started to expand. In 1977, federal legislation allowed U.S. credit unions to offer new services to their members, including share certificates and mortgages. That was a boost to credit union’s business. During the 70s, the number of credit unions more than doubled and assets tripled to more than $65 billion.
Deregulation, increased flexibility in merger and field membership criteria, and expanded member services was a big part of the credit union story in the 1980s. Early in the decade, high interest rates and unemployment brought supervisory changes and insurance losses too.
But the biggest crisis would come. During 2008, the NCUA chairman reported that corporate credit unions faced increasing liquidity issues. A significant portion of their mortgage-backed securities had lost value and were downgraded below investment grade due to deterioration of the underlying collateral.
In the run-up to the 2008 financial market meltdown, trouble was already brewing. A paper by the Congressional Research Service, Federal Deposit Insurance for Banks and Credit Unions, reported that “according to the National Credit Union Administration (NCUA), 15, 16, and 12 credit unions failed in 2005, 2006, and 2007, respectively; in comparison, 18 credit unions failed in 2008, 28 in 2009, 28 in 2010, and 16 in 2011. In addition, five corporate credit unions, which provide financial services for retail credit unions, saw severe liquidity pressures and were eventually placed under conservatorship by the NCUA.”
In 2009, the NCUA put two corporate credit unions, the U.S. Central Federal Credit Union and the Western Corporate Federal Credit Union into conservatorship. A year later, Constitution Corporate Federal Credit Union, Members United Corporate Federal Credit Union, and Southwest Corporate Federal Credit Union, were also placed into conservatorship. The chairman reported that five corporates under conservatorship represented approximately 70% of the entire corporate system’s assets and 98.6% of the investment losses within the system.
Regulators and legislators responded to the depletion of the Deposit Insurance Fund that resulted from the dramatic increase in failures and the temporary decline in the NCUSIF below its statutory level during 2010. One thing regulators did was to increase deposit insurance assessments on member institutions. The NCUA borrowed funds from the U.S. Treasury via the Temporary Corporate Credit Union Stabilization Fund (TCCUSF) to administer the conservatorships of the corporate credit unions. The 111th Congress also provided the FDIC and the NCUA with greater ability to meet the liquidity needs of depository institutions. In July of 2010, the Dodd-Frank Wall Street Reform and Consumer Protection Act became law. It permanently established NCUA’s standard maximum share insurance amount at $250,000, which mirrored the FDIC.
October 2016 marked an important milestone for the NCUA in its resolution of the corporate credit union crisis. The NCUA repaid $1 billion of outstanding balance on the agency’s borrowing line with the U.S. Treasury. With that payment, the Temporary Corporate Credit Union Stabilization Fund’s outstanding borrowings from the U.S. Treasury was fully repaid. Another milestone for the NCUA came in late 2016 when insured shares and deposits in federally insured credit unions grew, for the first time, to more than $1 trillion. The NCUA and the credit union system have experienced issues, but they remain safe, sound and secure.
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.”