Report
1
Number
Jan 01 1993

Implementing a Private-Federal Deposit Insurance Partnership

Professor Kane and his co-authors develop the details involved in implementing a plan that establishes a partnership between the federal insurer and one or more private insurers of credit union deposits.

Edward J. Kane
James F. Cleary Professor in Finance
Boston College
James C. Hickman
School of Business
University of Wisconsin-Madison
Albert E. Burger
Research Director
Center for Credit Union Research
Report Number 1

Executive Summary

In his first monograph, Implementing a Private-Federal Deposit Insurance Partnership, Professor Edward Kane examined the issue of “how to design a deposit insurance system that effectively monitors and polices risk-taking by credit unions and still allows them flexibility to expand and adapt to changing financial conditions.”

In the second monograph, Professor Kane and his co-authors develop the details involved in implementing a plan that establishes a partnership between the federal insurer and one or more private insurers of credit union deposits. This partnership integrates the timeliness and greater accountability of private management with the deep pocket, back-up protection of federal guarantees against catastrophic losses. Direct involvement of government officials in controlling the operations of credit unions is reduced. During a managed transition, progressively stronger components of market-driven decision making are gradually introduced into the system. This partnership plan is constructed with full knowledge of how and why other private deposit insurance systems failed. Structural protections are incorporated into this plan to avoid the flawed incentives that ruined previous private systems.

What is the research about?

The detailed plan presented in this report establishes a partnership between the federal insurer and one or more private insurers of credit union deposits. This partnership integrates the timeliness and greater accountability of private management with the deep-pocket, back-up protection of federal guarantees against catastrophic losses. Direct involvement of government officials in controlling the operations of credit unions is reduced.

What are the credit union implications?

Maintaining member confidence is key to the success of this partnership plan. Both the short-run and long-run values of the plan's four parameters should be determined by detailed analysis and negotiation among credit unions, NCUA, and the private insurer(s).

A major advantage of this plan is its flexibility. Initially, the parameters of the plan could be set so that members' deposit coverage remained the same as it is now. Over time, as the new system earned members' confidence, discussions could begin about the advantage of changing these system parameters. 

Under the new system, potentially each credit union could purchase the insurance package that best met the preferences of its membership. All automobile owners are not required to buy an identical and federally run auto insurance policy. Why should all credit unions be required to purchase an identical and federally run deposit insurance policy?