Editor’s Note: On July 18, 1984, President Reagan signed the Deficit Reduction Act, which included a bill to totally change the capital base of the NCUA Share Insurance Fund. The law required federally insured credit unions to deposit and maintain 1% of their insured shares as capital and limits the Fund’s total equity base to 1.3% of insured shares. Special assessments are no longer permitted under the new law. Moreover, the NCUA Board waived the 1985 premium and anticipated that the additional investment income from the 1% deposit will in almost all circumstances eliminate the need to assess the annual premium in future years. By anyone’s standards, the capitalization program was a success. Of the 15,303 federally insured credit unions, 99.8% met the deposit deadline and $845 million was deposited with the Fund. A second major achievement affecting the Fund was the first ever unqualified or “clean” opinion issued by the Fund’s external auditors, Ernst and Whitney, on the financial statements for the fiscal year ended September 30, 1984. The following is an edited version of remarks by NCUA Chairman Edgar F. Callahan and General Counsel Wendell Sebastian from two talks to credit union managers and to the credit union press. They discuss the capitalization plan and what credit unions have to do to make this new insurance system work.
Chairman Callahan: By early 1985 we will have transformed our Fund into the kind of deposit insurance needed in a deregulated environment. We became concerned about what our Fund should be three years ago, because let’s face it: insurance is a confidence builder, and we felt our fund might not be perceived to be the best. When we started in 1982 to move towards a goal of 1% of insured shares (the Fund’s “normal” operating ratio of equity to insured shares, as cited in the Federal Credit Union Act) the only technique at our disposal was the extra assessment. That wasn’t satisfactory, so we went looking for a better way. Congress required all the regulators to study insurance, but we did more than that. We did something about it.
We’ve said all along that it’s a better way, but it’s also unique… because really it is your Fund... First of all, we can run our operation and take care of insurance needs solely through earned interest. That means no more premiums. Second, we should be able to return to you a dividend on your deposit, and with a little luck it could be a market rate. You have literally gone from two premiums to almost free insurance.
What does this mean for you? It means you now have an investment in your Fund, instead of in your local bank or S&L. Can you forget about it? Well, I’d have to ask you, do you ignore your other investments, or do you monitor them? We tried very, very hard to build in safeguards so you would treat your investment in the Fund just like your other investments. One of them is withdrawability. If you feel things aren’t being run the way they should be, you can withdraw and go to private insurance. If the administrators of the insurance Fund start botching things up, those credit unions will take their money and go. And we’ll respond to that pressure.
Another safeguard is the 1.3% cap. Technically, it’s the Fund equity-to-insured shares ratio, and we’re going to draw it down to 1.3% right away, giving you a distribution of about .11 in January. So you’ll get money back, you will not send in a premium, and you won’t even have to deposit the full 1% of your insured shares. Your deposit will be between .85 and .9%, depending on your individual situation. But your books will carry a 1% deposit and you can record the .11 as income.
Another important safeguard is that we are required by law to report to Congress annually and to have an external audit annually. On top of that, we’ll have a monthly report during the open session of the Board meeting, so you can track what’s going on. And if this really is your Fund, then you have to do three things to keep it yours.
First, you have to track whether we are operating from the interest on the equity. If you see a dramatic increase in operating expenses, you ought to start asking what they’re doing with your money.
Next, what about the cost to the Fund for solving problems? You have got to watch that, too.
And the third thing you need to track: Are you getting a market rate for your deposit? If those trends start to turn sour, you’ve got to start asking questions. And you know, we can have problems, even with good management because if credit unions run into a bad streak, some of those trends will turn around. So ask some questions, and if the answers satisfy you, fine. If they don’t, make some changes. That’s what Congressmen are for. Call them up and make some changes.
So that’s the pitch I want to make on the Fund. Don’t set it up and forget about it. It’s unique. It’s a better way. But just as important, it’s yours to monitor—it’s your responsibility to keep it working—because if you don’t, it’ll go just like anything else the government touches. When government gets more money, it wants to spend more. Our goal is to spend less. You’ll have to hold us to that promise.
Sebastian: I want to touch on a slightly different aspect of the Fund. Credit unions are part of the only financial service system in this country that really has a significant, meaningful dual chartering system. But it won’t be as meaningful if you don’t have a dual insuring system, or multiple insuring systems in place.
I don’t know how many state charters are in the room, but if you believe that what we’re doing is not relevant to you, you might want to take another look at it. The viability of the dual chartering system has lasted this long because the feds have learned from the states, and the states have learned from the feds. One of them is out on the leading edge at any given time. And if you don’t use that— what we call “creative tension” — to your advantage, that’s a mistake. Even if you’re a state-chartered credit union, the Fund probably has a lot to do with how you’re insured, and you ought to look at it and make comparisons.
Q: What if the Fund doesn’t operate on interest earned? What if you get down into my deposit, and you don’t pay a dividend? What do we do then?
BS: Well, then you start yelling. You use your trade associations to pressure Congress to call the NCUA executives up to the Hill and hold a hearing on how they’re running the Fund.
Q: Yes, but that doesn’t accomplish a whole lot. We yell a lot, but we don’t get anywhere.
BS: Wait a second, I think your basic question is, What happens if the agency is run poorly, right?
Q: Basically that’s what I’m asking you.
BS: What has been your solution to that since day one? That doesn’t change.
Q: First of all, we should replace some people running it.
BS: Absolutely. But what I’m saying is it sounds like you’re suggesting that because we might have a weak administration in the NCUA, we ought to have a weak fund. That makes no sense. We’ve got the strongest Fund and it protects you in a lot of ways. I think it saves you from being merged into one of the other federal agencies. I think it saves you from being merged into one of the other insurance funds. I think it saves us from taxation. But I’m saying it doesn’t change the fact that the administration of the agency can be poor.
Q: But if our deposit is at risk—and I think you’ll agree it is—how valid is it as an asset?
BS: Clearly, the deposit is at risk. When you make loans, isn’t that a risk? But you feel pretty comfortable making loans because you know how to manage the risk. We’ve managed the Fund for three years, and we know what the risks are. And while technically, your deposit is at risk, as is every dollar you’ve got out in loans, practically speaking, it’s not at risk. Doomsday isn’t going to come. It’s the credit union managers who will decide how severe the risk is, not us.
Q: Will there be an opportunity for a review process, so we can be sure the money is being invested on a timely basis, at the best rate, and so forth? The whole thing seems to revolve around the assumption that whoever manages that money will do a better job than we can do in our own shops.
BS: This plan is not based on the assumption that we can manage your money better than you can. We’re sure if you put it out in loans to your members you’d make more than we will investing in Treasuries and agencies. What we’re saying is it’s cheaper because you will not have to expense a premium. If you don’t have to pay a premium and we can invest that money in Governments, the net effect to you will be to your economic benefit.
Chairman Callahan: In closing, let me say I think the credit union movement is out in front with deregulation. It is profitable and improving, and its insurance mechanism is postured for the future. And for the first time, credit union people will be interested in the operations of the Fund. It’s their money.
We set up a system where we are going to be scrutinized by the person writing the check to us annually because he or she will want to know where his or her dividends are. With that kind of scrutiny, we have to be right on top of things.
And if you take it a step further, that same person will soon start asking us what we’re doing about problem credit unions. He or she’s going to start saying, “Hey, you’re letting these people go too long. I’m paying that, and I don’t want 208 funds all over the place!” Because failures will affect each credit union’s bottom line, the standards we will have to live with will be far stricter than they were in the past. I think the stricter the standards people hold you to, the more incentive you’ve got to do a better job.