Interesting Thoughts from Credit Union CEO on NCUSIF

Henry Wirz, CEO of SAFE Credit Union in North Highlands, California, expressed some interesting thoughts about the National Credit Union Share Insurance Fund (NCUSIF) in a letter to the Credit Union Journal. He advocated that credit unions should change the way they fund the NCUSIF from the one percent capitalization deposit to expensing premiums. He also writes that having the insurer and regulator under a single entity, NCUA, is a problem. He believes that this structure has contributed to regulatory forbearance.

Below is the letter.

Reprinted with Permission, Credit Union Journal, Oct. 11, 2010.

(Washington league CEO) John Annaloro is right (see related story [paid subcription]). The insurance fund deposit is procyclical. The insurance fund has an operating level of between 1.20 and 1.30% of insured shares. But only about one-sixth of the fund has been expensed by credit unions, the rest is carried as an asset. When a big crisis occurs we have to either take a big expense hit or we amortize the cost over the next seven years as we did with the corporate expense. Either alternative is bad accounting. GAAP calls for matching the expense with the period in which the expense is incurred. We should switch to a premium-based insurance fund and incur an annual premium.

The other problem with the insurance fund is that we have the regulator and the insurance fund as one entity. NCUA has failed to exercise prompt corrective action, because it is in NCUA's best interest to hide failures and to get rid of problems through mergers. The NCUA Inspector General has repeatedly cited NCUA for contributing to credit union failures through bad examination procedures. Granted, the main cause of failures is bad management, but forbearance and lack of prompt corrective action increases the cost of failures and the frequency of failures. NCUA has no incentive to be transparent about the costs of failures because that too is a sign of failure. FDIC is transparent and is prompt with corrective action because FDIC is independent of the regulator.

John Annaloro is right and the rest of the trades should support major changes to the insurance fund. We need a premium-based insurance fund and we need an independent insurance fund. We also need more changes in the NCUA examination and oversight function.