ASI and Federal Home Loan Bank Advances

H.R. 3584 would permit privately insured credit unions to join a Federal Home Loan Bank. But what needs to be discussed is the financial viability of a private insurer to a failure of a non-federally-insured credit union with a significant level of secured advances from a Federal Home Loan Bank (FHLB).

Advances provided by the FHLBs are secured and have priority in any financial institution failure. In other words, the interest of deposit insurers -- whether the Federal Deposit Insurance Corporation (FDIC), National Credit Union Share Insurance Fund (NCUSIF), or American Mutual Share Insurance (ASI) -- are subordinated to the claims of FHLBs, which means greater losses for deposit insurers in a failure.

In fact, the FHLB system has never lost a penny on advances in its history.

However, there are major differences between both federal deposit insurers and ASI. Both the FDIC or NCUSIF have large and geographically diversified memberships; but also have the full faith and credit backing of the Federal government.

On the other hand, ASI has a small number of state chartered credit unions as members and lacks geographic diversification. There are 137 privately insured credit unions as of June 30th located in 9 states with almost 95 percent of the deposits of privately insured credit unions concentrated in five states. In addition, ASI does not have any federal backing.

Given ASI's limited resources, a failure of any institution with an exposure to FHLB advances would likely have a significantly larger impact on ASI relative to losses faced by the FDIC or NCUSIF. The cost of such a failure would be difficult for privately insured credit unions to absorb, given the small pool of privately-insured credit unions.