Rhode Island's Bank Holdiay

January 05, 1991

Rhode Island's new governor, Bruce G. Sundlun, wasted no time after being sworn in this past week before taking emergency action to close 45 credit unions and small banks with $1.7 billion in assets and 300,000 accounts. The private insurer of these institutions had insufficient reserves to cover a large embezzlement at one bank and a run on deposits. Now the state faces the likelihood of a huge bailout even as it copes with a $160 million budget deficit that is still growing.

Does this situation sound familiar? Back in 1985, Marylanders faced a similar predicament when its own privately insured savings and loan industry collapsed, leaving taxpayers with a bill that topped $180 million. Though Maryland didn't have any legal obligation to reimburse S&L depositors, elected officials believed the state had a moral responsibility. Now Governor Sundlun is mulling over that same question.

Rhode Island's predicament raises again the issue of private insurance for financial institutions, in this case credit unions. In Maryland, 13 credit unions are privately insured, though state officials have been trying since the S&L fiasco to persuade them to seek federal insurance. Two months ago, the Department of Fiscal Services recommended the system of private insurance be abolished because of the state's potential risk.

That proposal is likely to get no further than earlier plans to force credit unions to obtain federal insurance. The institutions are adamantly opposed to the idea. Their combined deposits are only $61 million. Their private insurer has three times more reserve coverage than the federal credit union association. And these small credit unions are conservatively run and stick to taking in savings deposits and making personal loans.

Still, if anything were to go wrong the state might indeed feel obligated to come to the rescue. That could be avoided were all credit unions to seek federal insurance. This offers members of these 13 credit unions greater assurance that their funds are secure, even in times of crisis.

Maryland's privately insured credit unions are in far better financial shape than their Rhode Island counterparts. But the directors of these credit unions have an obligation to provide their members with every possible guarantee that their money is safe. Given the current scare in Rhode Island, it may be time for local credit unions with private insurance to re-think their situation. It is always better to be safe than sorry.

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