Friday, July 24, 2009

Insurance Premium – Strong CUs Subsidizing Weak CUs

At its September Board meeting, the NCUA Board will be considering whether to assess an insurance premium on all federally-insured credit unions.

By law, if the NCUSIF equity ratio is below 1.2 percent, NCUA must assess all credit unions to restore the share insurance fund to 1.2 percent. All indicators suggest that the NCUSIF will be below the 1.2 percent threshold.

The credit union trade press is estimating that this assessment will be about 15 basis points of insured shares (deposits) to return the fund to its desired level.

The Federal Credit Union Act requires the premium assessment to be the same for all insured credit unions regardless of the risk the credit union poses to the insurance fund.

So, when NCUA mails the invoices to all insured credit unions, the vast majority of sound and well-managed credit unions will be subsidizing the behavior of the riskier, poorly operated credit unions. Because they will all pay the same rate. Moreover, the loss burden from any credit union failures will be disproportionately shared by these stronger performers.

Instead of the current flat rate assessment, the credit union industry and its regulator should advocate for a risk-based premium system. This risk-based system can be designed to work in conjunction with the current NCUSIF capitalization deposit to better align incentives.

This would ensure riskier credit unions are paying their fair share of the cost to the NCUSIF.

1 comment:

  1. Oh, Yes! This sounds Great!
    But, wait, wouldn't the NCUA determine that the most profitable and sound CU's are also the most risky? Yikes! The innocent would pay even more!



The content is provided for educational purposes only, with the understanding that neither the authors, contributors, nor the publishers of this site are engaged in rendering legal, accounting or other expert or professional services. If legal or other expert assistance is required, the services of a competent professional should be sought.

Comments appearing in response to articles appearing on this site do not necessarily reflect the views of the ABA. ABA makes no representations regarding the truth or accuracy of commentary or opinions that may be posted in response to the articles that appear on this website.

The inclusion herein of any link to a website, either in the text of an article or in a comment, does not denote any approval, sponsorship, or endorsement by the ABA, and ABA is not responsible for the content or opinions expressed on those linked websites or related commentary. This content is not licensed to third parties sites and is not affiliated with any third party site. Any reference to the author or this content on any third party site on the Internet is not authorized by the ABA.

It is the policy of the American Bankers Association to comply fully with all antitrust laws. Certain discussions should be considered off-limits, including those that contain competitively sensitive data such as price and cost information, or statements that could be construed as reflecting an attempt or desire to control or influence a particular market or markets. Future pricing or other prospective competitive information should never be shared.