Credit unions continue to be spared a federal share insurance premium, for now.
The equity ratio of the federal fund that insures savings in credit unions is projected to drop to 1.22% by this June 30, returning to the level of one year earlier following unusually rapid share growth driven by the COVID-19 pandemic – but not so low as to trigger a statutory requirement for a fund restoration plan or premium assessment.
The National Credit Union Administration (NCUA) projection for the June 30 equity ratio, released during Thursday’s open meeting of the NCUA Board, is based on the adjustments credit unions made Dec. 31 in their 1% deposit in the National Credit Union Share Insurance Fund (NCUSIF), projected June 30 retained earnings, and projected June 30 insured shares. The sum of the first two items is divided by the third – June 30 insured shares – to get the projected equity ratio.
Agency Chairman Todd Harper said it appears that low interest rates, which affect the fund’s earnings on its Treasury investments, and elevated share growth may continue and seem on track to eventually drive the fund level below its statutory minimum. “We should brace for that reality, but we should also remain calm,” he said.
“The questions of when to charge premiums and how much depend very much on a variety of actors, including where the board sets the desired normal operating level, the potential for future losses within the system, the capacity of credit unions to absorb a premium, and the need to protect the 1% capitalization [deposit] from any impairment,” the agency chairman said.
The Federal Credit Union Act (FCUA) requires that the board set a normal operating level (NOL) for the NCUSIF that is not lower than 1.2% and not more than 1.5%. The board sets this level as the target equity ratio for the NCUSIF. If the fund exceeds the board-set NOL, the fund must distribute the excess to insured credit unions. Harper noted that if it falls below 1.2% or is projected to do so in six months, the agency board would be required to implement a restoration plan, assess a premium (or premiums), or both to get it back to 1.2% within eight years.
Input sought on setting of NOL policy
Due partly to changes in some of the factors that underlie the current NOL policy, the board on Thursday voted (3-0) to put the matter of how the board sets that policy before the public.
The current NOL policy considers, among other things, the modeled performance of the fund over a five-year period, assuming a moderate recession; the modeled potential decline in value of the fund’s claims on the corporate asset management estates in a moderate recession; and the projected equity ratio decline through the end of the following year without an economic downturn.
The board’s notice invites comments on the policy and approach for setting the NOL and “any other relevant issues” they believe the board should consider. The board’s specific questions are:
- Should a moderate recession be the basis for evaluating the Insurance Fund performance during an economic downturn, or should the NCUA change the policy to consider a severe recession?
- What data source(s) should the NCUA use for determining the characteristics of a potential moderate or severe recession – the Federal Reserve scenario, an independent source, or the NCUA’s judgment?
- Should the NCUA continue modeling the performance of the Insurance Fund over a five- year period or a longer or shorter period?
- How should the NCUA utilize the modeled potential decline in value of the Insurance Fund’s claims on the corporate asset management estates going forward until the estates are fully resolved?
- Should the NCUA continue to incorporate in the Normal Operating Level analysis the projected equity ratio decline through the end of the following year without an economic downturn? Should this period be longer or short, or not factored into the analysis at all.
- Given forecasting uncertainties and timing challenges, would it be reasonable for the NCUA to change the requirement to request public comment only if the Normal Operating Level were to change by a larger amount than just one basis point?
- Should the Normal Operating Level be re-evaluated in the midst of an economic downturn or should it be left unchanged until the onset of an economic recovery?
- Should the Normal Operative Level be re-evaluated on qualitative factors based on the COVID-19 pandemic?
- Is there any other information that the NCUA Board should consider when setting the NOL?
The board and staff noted the request for comments is not required but is an effort at transparency. The agency said the earliest any NOL policy changes would take effect is the end of 2021.
Comments will be due 60 days after the notice is published in the Federal Register.