This is the third in a series of articles that look at the evolution of deposit insurance in America. Last week looked at the NCUA; this article presents an overview of deposit insurance in America, with an emphasis on private deposit insurance.
The FDIC and NCUA are the primary insurers of deposit accounts, but the Depositors Insurance Fund, DIF, in Massachusetts is a private, industry-sponsored insurance fund that insures all deposits above Federal Deposit Insurance Corporation limits, at Massachusetts-chartered savings banks. It has been insuring deposits since 1934. DIF covers savings, checking, NOW accounts, certificates of deposits, money market deposit accounts and retirement deposit accounts.
DIF member banks with branches outside of Massachusetts are still protected. Depositors in a DIF member bank can rest assured that their deposits are fully insured. DIF coverage has no bearing on where a depositor lives or where a member bank branch is located.
DIF has more than $350 million in the assets, according to the paper American Share Insurance: The Sole-Surviving Private Deposit Insurer in the United States. The recession of the early 1990s, proved to be the worst financial period in the history of the Massachusetts savings bank industry. The DIF paid out more than $50 million to protect over 6,500 depositors in 19 failed member banks. However, there was good news after the bad. The DIF emerged from this tumultuous period financially stronger than before the recession began.
What safeguards are in place? The law in Massachusetts restricts what DIFs can invest in. Investments must be suitable for an institution that insures the public’s deposits. This means the DIF primarily invests in U.S. Treasury and federal agency obligations, and obligations fully guaranteed by the U.S. government. Depositors can also take comfort in the fact that DIF investments are reviewed by its Board of Directors to assure conformity with both the law and DIF investment policies. In addition, DIF receives financial reports from its member banks on a quarterly basis. Formal examinations are done regularly by the FDIC and the Massachusetts Division of Banks. The DIF meets with officials of both agencies to review and evaluate the condition of its member banks. It is examined annually by Massachusetts Division of Banks and audited by an independent auditor.
During 1955-1981, there were nearly 20 nonfederal insurers for credit unions and 11 for thrifts. The private system had its critics. More than half of nonfederal thrift deposit insurers eventually failed because they were unable to cover their commitments to insured depositors. The worst failures, according to the report on ASI, happened in Mississippi in 1976, Nebraska, 1983, and Ohio and Maryland in 1985. Legislators in other states responded by requiring thrifts to get federal deposit insurance. Still, three more failed in Utah, Colorado and Iowa, leaving just four thrift deposit insurers standing. However, on the credit union side, the story is decidedly different. Only one nonfederal deposit insurer catering to credit unions, the Rhode Island Share Deposit Indemnity Corporation, RISDIC, has ever failed. It did so in 1991.
In the early 1980s , Connecticut, New Mexico, Wisconsin, Virginia, Utah and Texas required their state-chartered credit unions to obtain federal insurance. Consequently, nonfederal deposit insurers in those states closed. It is said that heavy political pressure, including threats of state and federal legislation, led credit union deposit insurance systems in California, Florida, Georgia, Massachusetts, Tennessee, and Washington to “voluntarily” stop providing an alternative to federal insurance. No insurer of strictly credit union deposits has failed. Those that closed, did not fail. They delivered on their promise of coverage and imposed no losses on depositors.
It's important to note, that some say that laws that prevent nonfederal deposit insurers from operating across state borders expose these insurers to geographic-concentration risk. RISDIC, for example, wanted to offer deposit insurance in other states, but its state regulators wouldn’t permit it. They were impacted by their inability to diversify. Being able to operate within a single state essentially limited the number of institutions nonfederal systems insured. Look at Maryland. During the early 1980s, Maryland’s credit union deposit insurer covered only 27 institutions and North Carolina, only 25. With so few insured institutions, losses at a single organization could have a significant impact on the insurer. The most dramatic failures of nonfederal thrift deposits were precipitated by the failure of their largest insured institution (Mississippi, where the failing thrift accounted for 45 percent of insured deposits; Nebraska, 20 percent, and Ohio, 19 percent), or the second largest institution (Maryland 13 percent and RISDIC, 15 percent).
Today, only two private deposit insurers remain, American Share Insurance (ASI) and the private deposit insurance in Massachusetts for excess deposit insurance. More on this next week.