On April 15, 1983, the NCUA sent a Report to Congress on the origins and future of the NCUSIF. It is required reading for anyone who wants to learn of the unique role of share insurance for the cooperative system and the basis for its restructuring in 1984.

While all three federal funds responded to Congress’s special request, only the NCUA’s proposals were adopted in the Deficit Reduction Act in 1984, changing the whole approach to cooperative share insurance.

Moreover, only the NCUSIF has continued to function in this financial structure for 40+ years. The FSLIC failed and was merged into the FDIC. The FDIC has reported negative net worth during several subsequent banking crises and experimented with multiple adjustments in its premium-based financial model.

In Chairman Callahan’s April 15 cover letter, he made four important points:

1. All credit unions, including FCUs, should have a choice of share insurance, either state-authorized or NCUSIF.
2. Financially restructure the core design of the NCUSIF with a one-time 1% deposit of insured shares, which would be adjusted annually thereafter.
3. The membership share required of members to join should be uninsured and be part of a credit union’s reserves (net worth).
4. The NCUA opposed consolidation of the three federally managed funds.

The report was a unique document. It was based on comments from multiple cooperative organizations, historical facts, and operational realities, not academic theory or untried alternatives. It pointed out that FCU’s operations had grown dramatically without federal insurance from 1934 to 1970.

CUNA and leagues opposed federal insurance for many years as incompatible with cooperative principles. Some of the reasons for opposition included:

• It was unneeded and would add to the cost of operations. No credit unions had failed during the bank holiday of 1932, and studies showed minimal losses when liquidations occurred.
• Federal insurance would not get at the causes of failures and undermine the roles of supervisory and audit committees.
• Most importantly, federal insurance would reduce the number of credit unions in operation, put an end to new charters, and introduce a “federalization” of the dual chartering system.

Why Congress approved the NCUSIF

When NAFCU and CUNA were able to compromise on a common bill in 1971, the environment was entirely different from the circumstances that led to the creation of the FDIC and FSLIC four decades earlier. The Congressional Report on the bill noted in part:

“Despite the lack of insurance, credit unions have grown to the point where there are now more credit unions than all (other) financial institutions combined. Despite this remarkable and rapid growth, credit unions have maintained an outstanding record of safeguarding member shares. Your committee wishes to make clear…federal insurance should be considered as a reward for the outstanding job performed by credit unions.”

The purpose of cooperative insurance

At the time of this 1983 report, there were a range of options available to credit unions reflecting the multiple efforts to provide system resources in the event of institutional problems. Several states or Leagues had created “stabilization funds” to assist troubled credit unions. Central credit unions were used to facilitate mergers and purchase of assets if credit unions failed. The private insurers developed in parallel with NCUSIF’s initial years covered 3,150 state charters with $12.4 billion in assets.

The role of the NCUSIF today

The purpose of insurance and its multiple cooperative predecessors was not to facilitate liquidations. The intent was to have a common pool of credit union capital resources to resolve problem situations both collectively and individually.

This collective role was used in 1982 when almost 100 credit unions that had invested in Penn Square Bank’s CDs above in FDIC insured limit received non-earning “receiver’s certificates” with an estimated recovery value of 80%. Both the CLF and NCUSIF stepped in to prevent any institution from becoming insolvent. NCUSIF capital was injected into multiple large problem credit unions from the turnaround at San Diego Navy FCU (the 9th largest in 1980), to the recovery of San Antonio FCU in 1990.

Because there is no private ownership or capital at risk, unlike the FDIC, credit unions’ collective insurance is more akin to a cooperative hedge fund. The purpose is always to find the most effective way to continue operations and credit union service, not to liquidate or induce mergers for someone else to figure out solutions. That ability requires judgment, creativity, and concern for the members’ and cooperative system’s future, not just problem resolution.