A banking and credit union debacle similar to Rhode Island’s is virtually impossible in California, regulators and industry officials said Friday.
That’s because strict state rules prohibit credit unions from speculating in risky investments, they said. Credit unions here also are seen as healthier and their insurance methods are considered sounder than those used in many other states.
Further, nearly all financial institutions in the state carry federal deposit insurance, as opposed to the less-solid state or private insurance funds at issue in the Rhode Island crisis. Accounts in all banks and savings and loans in California are federally insured up to $100,000. So are deposits in similar institutions called thrift and loans. Credit unions don’t have to be federally insured and are given the option of using private insurance. But few take that route.
Of California’s 912 credit unions, with $32 billion in assets, more than 95% are federally insured. That means that the government backs credit union funds up to $100,000 per account in the same way it backs bank and savings and loan deposits. The 35 California credit unions with $1.2 billion in assets that do not use the federal system use one of two private insurers that regulators contend are stable.
“If we didn’t think they were safe, we wouldn’t allow it,” said Al Taylor, special administrator with the Department of Corporations, which regulates state-chartered credit unions.
Questions about credit union stability have arisen since Rhode Island earlier this week closed 45 credit unions and small banks after a private deposit insurer failed, triggered by an alleged embezzlement at one institution. Some of those credit unions are deeply troubled, prompting the financially ailing state to scramble to come up with a bailout plan. Concerns in particular have grown about the health of state-chartered credit unions because they are loosely regulated in many states.
Regulators and insurance officials say, however, that health and supervision of credit unions varies greatly between states, and that California’s credit unions rank among the healthiest and most closely regulated. Real estate loans on risky commercial projects have been the main problem at many troubled credit unions. But in California a maximum of 40% of a credit union’s loan portfolio can be used for real estate loans, and they effectively are limited to owner-occupied housing, the safest type of real estate loan.
Less than one-third of California’s credit unions are state-chartered. All credit unions in California since 1981 have been required to offer either federal or private insurance for the funds held by members.
The federal insurance system for credit unions backs funds up to $100,000 and is administered by the National Credit Union Administration. The 35 that opt for private insurance use one of two firms, National Deposit Insurance Corp. in Dublin, Ohio, and Share Guaranty Corp. in Pomona.
The Ohio firm insures funds up to $250,000, with the Pomona firm insuring deposits up to $150,000. Industry officials say the reason credit unions usually choose private insurance is so they deal with one less regulator.
Regulators in California consider those private insurance systems to be financially healthy. One reason, they said, is that the insurers deal only with credit unions. In Rhode Island, for example, the insurer that collapsed also insured banks, which have been battered as New England’s economy faltered.
Laura Porter, chief executive of the Pomona insurer and chief operating officer of the California Credit Union League, argues that both of the private insurers have large cushions of money backing up funds. She said the Pomona firm has reserves of $1.55 for every $100 in funds, and the Ohio firm $1.42 for every $100. The federal credit union insurance fund has about $1.28 per $100 in funds. By contrast, the nation’s fund insuring bank deposits has reserves of only about 60 cents per $100 in deposits.
However, some officials, notably Federal Deposit Insurance Corp. Chairman L. William Seidman and some bankers, have questioned the overall health of the credit union industry.
In a speech early last year, Seidman said many credit unions have come to resemble troubled S&Ls; because they are investing in areas with which they have no experience. He also said credit unions overstate the strength of the insurance system that protects funds because they count money on deposit with the insurance fund in calculating their assets.