Credit Union Deposit Insurance: Purpose, Management, and Policy Issues
CRS Report for Congress
Received through the CRS Web
Credit Union Deposit Insurance: Purpose,
Management, and Policy Issues
Pauline H. Smale
Economic Analyst
Government and Finance Division
Summary
The federal deposit insurance fund for credit unions is the National Credit Union
Share Insurance Fund (NCUSIF). The insurance fund is administered by the National
Credit Union Administration (NCUA), the federal regulator for the credit union industry.
Membership in the NCUSIF is mandatory for federal credit unions. The vast majority
of state-chartered institutions are also federally insured. Funds deposited into accounts
at credit unions are covered to $100,000, the same as provided by the Federal Deposit
Insurance Corporation (FDIC) for banks and thrifts.
To carry out its management responsibilities and protect the insurance fund, the
NCUA has developed procedures to evaluate the financial condition of federally insured
institutions. The agency has established policies to “resolve” troubled credit unions and
to close failed institutions. In addition, the NCUA monitors the adequacy of NCUSIF
reserves as a standard measure of the fund’s health.
The 107th Congress has shown an interest in examining various issues surrounding
federal deposit insurance. A key concern is maintaining a balance between providing the
benefits of deposit insurance and promoting sound management practices at banks,
thrifts, and credit unions. Current legislative proposals to raise the $100,000 coverage
at banks are of interest to credit unions because any increase in the level of coverage
would probably be extended to credit unions. This report will be updated to reflect
legislative developments.
Background
The federal deposit insurance fund for federal credit unions and state-chartered
institutions is managed by the National Credit Union Administration (NCUA), the federal
regulator for credit unions. The NCUA is an independent agency governed by a three-
member board. The board is responsible for chartering, supervising, and examining federal
Congressional Research Service The Library of Congress
credit unions. State regulators have primary supervisory authority over state-chartered
credit unions. They work in cooperation with the NCUA to ensure that these institutions
meet safety and soundness standards.
The NCUSIF was created in 1970 by P.L. 91-468. Insurance is mandatory for federal
credit unions. Federal deposit insurance is still optional in a few states but most state-
chartered institutions are federally insured. In December 2000, there were 6,336 federal
credit unions and 3,980 federally insured state-chartered credit unions. These federally
insured institutions held assets totaling $438.2 billion and had a total membership of 77.6
million. The NCUA reports that fewer than 500 credit unions remain non-federally
insured.1
Deposit insurance coverage is the same for credit unions as for banks and thrifts,
insured accounts are covered up to $100,000. Deposits maintained in different categories
of legal ownership (e.g.,a trust account) or funds held for retirement purposes (e.g.,
Individual Retirement Accounts) are separately insured. Therefore it is possible for
individuals to have considerably more than $100,000 coverage in an individual institution.
Credit union organization
Many of the financial services provided by credit unions are similar to those offered
by banks and thrifts but they are distinguishable because of their cooperative framework
and unique charter requirements. The original concept of a credit union was a cooperative
organization formed for the purpose of promoting thrift among its members and providing
them with a source of low-cost credit. Credit union charters are granted by federal or
state governments on the basis of a “common bond.” This requirement determines the
field of membership, and is unique among depository financial institutions. The common
bond for establishing a credit union might be occupational, associational, or community.
Individual credit unions are owned by their membership. Members’ savings are
referred to as “shares,” and earn dividends instead of interest. Credit union loan and
investment powers are more restrictive than commercial banks. Credit unions can only
make loans to their members, to other credit unions, and to credit union organizations.
Credit unions can invest in government or government-guaranteed financial instruments.
Because credit unions are considered financial cooperatives, the institutions are exempt
from federal income tax. Individual members are taxed on their dividends.
Credit unions rely on volunteers. The members of a credit union elect a volunteer
board of directors from their institution’s membership (one member, one vote). Only one
director may be compensated. The board appoints member-volunteers to a supervisory
committee which oversees the institution’s financial operations. Professional staff may be
hired. This is more common at the larger credit unions.
1 [http://www.ncua.gov]
Financial Structure of the Fund
The NCUSIF was established in 1970 without start up capital from the U.S.
Treasury. Premiums from insured credit unions were the fund’s primary source of income.
This arrangement was similar to that of the FDIC. Premiums were used to pay the fund’s
operating expenses, cover losses, and build reserves. Premiums were set at 1/12th of 1%
of the total amount of member share accounts. The fund also generated income from
investing its reserves in government securities. During the first decade of operations the
insurance losses from troubled or failed credit unions were minimal. This situation
combined with low operating expenses allowed the fund to build reserves towards the
statutory target of 1% set by P.L. 91-468. By 1979 the ratio of equity to insured shares
had risen to 0.32 %.2
The decade of the 1980s was a period of stress and change for all financial
institutions and federal insurance funds. By the early 1980s the NCUSIF was operating
under the constant pressure of a growing caseload of problem and failing institutions.
Insurance losses threatened the fund’s solvency. The NCUA requested recapitalization
legislation from Congress. In July 1984. P.L. 98-369 provided for the strengthening of
the fund.
Each insured credit union was required to place a deposit with the fund in an amount
equaling 1% of its insured shares. The 1% is carried on each individual institution’s books
as an asset. The NCUSIF’s reserves consist of the 1% deposit, the fund’s accumulated
insurance premiums, and interest earnings. The goal was to achieve a normal operating
level for the ratio of fund equity to insured shares of 1.3 %. An annual premium can be
imposed to achieve this ratio. In addition, if the reserve ratio exceeds
the NCUA announced it would issue a dividend for the sixth consecutive year.3
Fund Management
NCUA management of the Fund includes monitoring insured institutions, identifying
problems and resolving troubled institutions. The agency has developed policies and
procedures for determining the financial condition of insured institutions and dealing with
financially troubled credit unions. Credit unions are examined on an annual basis. Insured
credit unions also submit financial reports to the NCUA.
Information from exams and reports is used to assess the financial condition of a
credit union. The NCUA uses a rating system called CAMEL, a similar system is used by
banks and thrift regulators. CAMEL is an acronym representing five key areas that are
evaluated: Capital adequacy, Asset quality, Management, Earnings, and Asset/Liability
management. A composite rating on a 1 to 5 scale (with 1 indicating the strongest
performance) is assigned to reflect the overall condition of a credit union. An institution
with a CAMEL rating of 4 or 5 is considered troubled.
2 An Overview of the U.S Credit Union Industry. FDIC Banking Review. Fall 1990, p.19.
3 [http://www.ncua.gov]
Attention is given to credit unions with ratings below a CAMEL 2. Working with
the institution a plan for corrective action is developed. If problems persist the NCUA
may provide additional assistance; in general the policy followed is to avoid liquidation
while minimizing loss exposure and risk to the fund. The NCUA can provide cash and
noncash assistance from the NCUSIF. If the troubled credit union must be closed the
NCUA can arrange a merger, a purchase and assumption, or a liquidation using Fund
assets.
Policy Concerns
The extension of federal deposit insurance to credit unions contributed to industry
growth, attracting deposits and members. It has been suggested that share insurance
might diminish the inherit discipline of a member owned financial institution. Members
would know their money was safe whether or not the credit union was well managed.
In general, the intent of federal deposit insurance is to provide a degree of depositor
security that benefits institutions and individuals. Deposit insurance can help prevent the
type of panic behavior that can cause a “bank run”, which in turn can lead to the failure
of an institution. When an institution does fail, deposit insurance reduces the effects on
households and businesses. In addition, the economic instability that a failed institution
can cause a community or region is diminished.
Federal deposit insurance has raised concerns. A major issue focuses on providing
the benefits of deposit insurance without lessening the incentives for managerial discipline.
With insurance providing greatly diminished concern over depositors withdrawing their
funds, managers may take on more risk. This can be a factor for credit unions even with
more restrictive loan and investment powers. In addition, credit union management has
become more complex as credit unions have grown larger and with the legislative changes
provided by P.L. 105-219, the Credit Union Membership Access Act.4 This increases the
need for effective oversight and management of the NCUSIF by the NCUA.
Current Legislation
While legislation does not currently address the NCUSIF, it is likely that an increase
in the cap of $100,000 per account for FDIC coverage would result in an equivalent raise
in coverage by the NCUSIF for reasons of insurance equity. Recent congressional interest
in deposit insurance reform began in the 106th Congress. Various issues surrounding
federal deposit insurance and possible changes to insurance programs were raised at
hearings. Legislation was not enacted and the interest has carried over into the 107th
Congress. Several bills were introduced at the start of the first session.5 Most of the
legislation addresses the operations of the FDIC. Two bills, H.R. 746 and S.128, propose
changes to the level of coverage for FDIC insured accounts.
4 For more information, see CRS Report 98-933 E, Credit Union Membership Access Act:
Background and Issues, by Pauline H. Smale.
5 See CRS Report RS20724, Federal Deposit Insurance: Proposals for change, by William D.
Jackson.
Proposals to raise the $100,000 level of coverage and tie further increases to rises
in inflation have been the subject of debate for several years. The two current bills contain
similar provisions that would result in periodic cost of living adjustments to the level of
deposit insurance. In addition, they propose making retroactive adjustments that would
effectively raise the current level to around $200,000 upon enactment. The core issue for
proponents is attracting deposits. Increasing the level of coverage could attract more
funds to banks and thrifts away from alternative investment options. An increase in
deposits would make more money available for lending. Opponents worry an increase in
coverage could require more reserves at insurance funds and therefore would have the
potential cost of increased premiums. In addition, increasing deposit insurance could
create incentives for risk taking by an institution’s owners or managers. The NCUA has
not officially commented on proposals to raise the level of deposit insurance.