The last time the federal credit union regulator disclosed the equity ratio of the insurance fund that protects credit union member deposits was in September, and that ratio – 1.22% – was 16 basis points below its “normal operating level” of 1.38%.
On Thursday, during another report to the board on the National Credit Union Share Insurance Fund (NCUSIF), National Credit Union Administration (NCUA) staff said that the fund had received 99% of the adjustments due on credit unions’ 1 percent deposits in the fund but noted the next official update of the fund’s equity ratio – whose decline at mid-year was attributed to a rapid influx of deposits in credit unions – would be after the close of 2020.
According to agency figures, the fund had collected some $1.5 billion in capitalization deposit adjustments from insured credit unions having $50 million or more in assets. As of Sept. 30, the fund itself totaled $19.2 billion.
In September, staff said the fund equity ratio was expected to rise with the deposit adjustments; they also projected the equity ratio growing to 1.32% by year-end.
The equity ratio is of concern because, as of June 30, it was within 2 basis points of the statutory minimum, 1.2%, below which a restoration plan would be triggered by federal law.
NCUA Chairman Rodney Hood reiterated Thursday that the agency would take “all necessary actions” to ensure the fund remains strong and retains public confidence.
Board Member Todd Harper said the fund’s growth was heartening, but the drop in the equity ratio was a shock to many. He noted that continued growth in credit union assets, declining loan demand, compressed interest rates, decreased earnings, and subdued consumer confidence suggest that credit unions should be prepared for increased delinquencies, loan defaults, bankruptcies, and even failures.
“We have a number of higher-risk credit unions that we were already closely supervising,” he said. “So it seems very likely that we will see higher than average failures over the next two years. What is more, we also know that growth in credit union assets seems likely to continue to exceed the ability of the share insurance fund to earn interest given the new reality of very low interest rates for the next few years.”
Harper noted that since the insurance fund equity ratio is likely to continue to decline, “it is really not a question of whether we will charge an insurance fund premium, but a question of when. If we are honest with ourselves, we don’t know when – it could occur next year, the following year or sometime thereafter. Credit unions need to brace themselves for that eventual reality.”
The Federal Credit Union Act only permits the NCUA Board to charge a share insurance premium when fund equity ratio falls below 1.3% (but remains above 1.2%). If it stays above 1.3% at year’s end, the board cannot charge a premium this year. If the fund closes the year with an equity ratio below 1.2%, the board would be required to implement a restoration plan to return it to 1.3%.
The agency has a policy of publishing the NCUSIF equity ratio twice a year; that’s why another update isn’t expected until after the close of 2020. Board Member J. Mark McWatters, noting that concerns about the equity ratio and the fund will continue into next year, reecommended that NCUA modify its policy to present a transparent calculation of the equity ratio each month, with a detailed analysis of the numerator and denominator of the fraction that describes the insurance fund equity.
“The public dissemination of this information is of particular relevance as the covid pandemic rages and the resulting stresses on the credit union community and the insurance fund continue,” he said. McWatters said NCUA should also work with all constituencies “to address these critical issues in a transparant matter so as to mitigate the need for future premium assessments” in the context of the financial impact of the pandemic on CUs.