Federal credit union regulators, for now, have no plans to assess a premium on insured credit unions despite the deep decline from December 2019 to June 2020 in the equity ratio of the fund that insures credit union member shares.
The National Credit Union Administration (NCUA) Board discussed the fund during its open meeting Thursday. Staff, presenting a report on the National Credit Union Share Insurance Fund (NCUSIF), said the fund’s equity ratio dropped to 1.22% in June. That’s 13 basis points down from Dec. 31, 2019, and 16 bp below what the board defines as the fund’s normal operating level (NOL), last adjusted down to 1.38% at the end of 2018.
The report showed that the primary driver of the change was faster growth in insured shares.
The Federal Credit Union Act requires that if the NCUSIF equity ratio drops below 1.2%, the board must adopt a “restoration plan” to bring the equity ratio back up to the fund NOL.
The board discussed the insurance fund and the potential, future need for a premium amid continued economic uncertainty driven by the coronavirus pandemic during Thursday’s meeting.
The discussion was spurred in part by action Tuesday by the Federal Deposit Insurance Corp. (FDIC) Board, which adopted a restoration plan to restore its Deposit Insurance Fund’s (DIF) reserve ratio to at least 1.35% of reserves to total insured funds within eight years, as required under federal law. The BIF equity ratio has dropped to 1.3%, well below its statutory minimum of 1.35%; it hit a peak last December of 1.41%. The decline was solely attributable to “extraordinary” growth in the base of insured savings, the agency said.
The BIF restoration plan calls for no extraordinary measures. Instead, over the next eight years the FDIC plans to monitor deposit balance trends, potential losses, and other factors that affect the reserve ratio; maintain the current schedule of assessment rates for insured banks and other institutions; and provide updates to its loss and income projections at least semiannually.
NCUA staff, in response to questions from agency board Chairman Rodney Hood, said Thursday that no NCUSIF restoration plan was currently necessary. They also noted that credit unions are due in October to adjust their 1% deposits in the NCUSIF, reflecting their own recent growth, which staff said should bring the equity ratio well above the 1.2% level. In fact, staff projected the fund equity ratio will rise to 1.32% by year-end.
Still, Hood said “vigilance” is needed and noted the FDIC’s restoration plan action.
While Board Member Todd Harper agreed with Hood’s view, he also noted that the fund is just a “thin hair’s width” away from the requirement for a restoration plan to be triggered. Repeating comments he made earlier this week at an industry meeting in Washington, Harper said the NCUA Board must be prepared to charge a share insurance fund premium if events warrant it, “and credit unions need to be aware of that reality.” While acknowledging that levying a premium during an economic downturn is “less than optimal,” he also pointed to increased delinquencies, bankruptcies, loan defaults, and even credit union failures possibly ahead that could lead to problems.
Harper also reiterated his view that the NCUA should work with Congress after the current crisis to modify the share insurance fund’s operations, similar to how the FDIC operates. He asserted that FDIC has greater flexibility, an ability to charge risk-based premiums, and other advantages.
NCUA Board Member Mark McWatters said he was “apprehensive about a downward trend” in the equity ratio and noted the timing mismatch between replenishment of the 1% deposit and share growth. “Regrettably, it is not alarmist to foresee the equity ratio dipping below 1.2% in 2021,” he said, pointing to potential, future statutory consequences, including premium assessments. He urged that the NCUA work with all interested parties to address the issues to mitigate the need for the assessments and recommended that the agency now begin considering the development of a restoration plan as the pandemic continues.
Hood, noting the relatively short tenures left for both McWatters and Harper on the board, said that since he has a few more years left in his board term (it ends in 2023), he “looks forward to addressing the issues that Board Members McWatters and Harper” addressed during the meeting.
McWatters’ term expired in August 2019. He continues to serve in holdover status while his successor – Kyle Hauptman – awaits Senate confirmation. Harper’s term expires in April.