Back to Basics: Share Insurance
The failure of Silicon Valley Bank (SVB) and Signature Bank just over a week ago proved to be one of the biggest stories for the financial services industry in the past several years. Deposit insurance played a large role in the story, as initial reporting indicated that a number of SVB’s customers could lose millions due to having large amounts of uninsured funds at the bank. Ultimately the federal government stepped-in and guaranteed that SVB’s customers would get all their funds back. The National Credit Union Administration (NCUA), for their part, has touted the safety of the credit union industry by stating that “[n]o one has ever lost a single penny of insured share deposits within the credit union system.”
For credit unions, this ordeal raised some questions regarding the share insurance fund and how member shares are insured. NAFCU plans to publish a longer article in our Compliance Monitor in the coming weeks that will discuss the ins-and-outs of share insurance. For now, let’s review some questions the Compliance Team has received recently regarding share insurance:
How is Coverage Determined?
Generally speaking, share insurance coverage is based on the type of account in question. In NAFCU’s Compliance Roadmap we refer to the different account types as “buckets.”
For example, a member’s single-ownership share accounts (i.e. accounts owned solely by the individual) will be aggregated together for share insurance purposes, up to the standard maximum share insurance amount (SMSIA) of $250,000. That’s one “bucket.” Joint accounts, on the other hand, are a separate “bucket” and are insured separately from individual accounts – a member’s interests in all his or her joint accounts will be aggregated together and that “bucket” of joint account funds will be insured up to the SMSIA of $250,000. Payable-on-death (POD) accounts are insured separately from other types of accounts. These accounts are formed when a member names beneficiaries to the account and indicates an intent for the funds to transfer to the beneficiaries upon his or her death – this creates a “revocable trust account.”
The list goes on – and the specific rules are found in Part 745 of the NCUA regulations – but the general rule is that different account types are insured separately up to the $250,000 limit per type. In theory, a member could maximize his or her share insurance coverage by having a diverse number of account types – i.e. individual ownership accounts, joint accounts, POD accounts, etc.
Insuring Shares of Non-members
What about non-members who somehow have funds at the credit union? Do they still receive share insurance? The answer is generally, “no.” As noted in this 1993 legal opinion letter, the share insurance regulations define “account” to mean share accounts of a member. Thus, funds owned by non-members are generally not covered by share insurance.
The Federal Credit Union Act (FCU Act) does permit Federal Credit Union (FCU) members to add a non-member as a joint account owner with the right of survivorship. In those situations, section 745.8(e) states that the non-member’s interest will be insured “in the same manner” as the member’s interest in the account. Notably, however, a joint account will only be insured separately from individual accounts if it is a "qualifying" joint account. Section 745.8(c) discusses when an account is a qualifying joint account, such as when each account owner has signed a signature or account card and has equal access to the funds. Notably, section 745,8(c)(2) notes that signatures are not required if the FCU has evidence that the joint owner has been given an access device or has used the account. FCUs, therefore, may want to check their joint accounts to determine if they have the signatures or other evidence required by section 745.8(c), as that will determine if the joint account will be insured separately from the owners' individual accounts. For nonmember joint owners, however, this 1997 legal opinion letter indicates that the joint owner will not receive share insurance on their interest if the account is not a "qualifying joint account."
Finally, it should also be noted that the FCU Act permits low income credit unions (LICUs) to accept shares from non-members. The share insurance regulations define “account” to include accounts of nonmembers “where permitted under the act.” Thus, accounts opened by LICUs for non-members are eligible for share insurance.
Insurance for Business Accounts
What about members who also own businesses, such as a corporation or partnership? Section 745.6 states that accounts of corporations, partnerships or unincorporate associations will be insured separately from the accounts of the person(s) owning them, so long as the corporation, partnership or association is engaged in an “independent activity.”
An “independent activity” is “an activity other than one directed solely at increasing insurance coverage.” Consider, for example, a member who tries to create ten different LLCs, all for the purposes of increasing his share insurance coverage. Those LLCs would not be engaging in an “independent activity,” because they were formed solely for the purpose of increasing share insurance coverage. Accordingly, the rule states that accounts of businesses which are not engaged in an independent activity will be treated as though they are the accounts of the business owner. Thus, the accounts of the 10 LLCs in our example would likely be grouped into the owner’s “single ownership share account” bucket for insurance purposes.
Requiring Notice before allowing for withdrawal
Notably, an FCU can impose certain requirements before permitting a member to withdraw all or part of his or her funds. In particular, the current FCU Model Bylaws states:
“The board has the right, at any time, to require members, or a subset of members, to give up to 60 days written notice of intention to withdraw all or part of the amounts they paid in.”
Thus, if an FCU has adopted bylaws that include this provision, then the FCU can potentially require a member to provide 60 days written notice before withdrawing “all or part” of their share account funds. Requiring such a “cooling off” period could help prevent a “bank run” like the one seen at SVB – however, placing restrictions on members’ ability to access their funds could carry some reputation risk, so credit unions may want to weigh their options and consult with their legal counsel before making a decision on this topic.
If your credit union has questions regarding share insurance, there are a number of resources that can help you. NCUA has published this brochure for credit unions to provide to their members to explain share insurance, and also offers this share insurance estimator that can help credit unions work out how different accounts will be insured. Additionally, NAFCU member credit unions can submit their share insurance questions to NAFCU’s compliance team by emailing us at firstname.lastname@example.org.
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About the Author
Nick St. John, was named Director of Regulatory Compliance in August 2022. In this role, Nick helps credit unions with a variety of compliance issues.