Cloud of insurance premium overshadows board discussion

(Nov. 20, 2020) A premium for the federal credit union savings insurance program for this year is unlikely, but the outlook for next year and beyond is not so clear following conversation by members of the NCUA Board on Thursday.

Meeting for their regular monthly meeting for November, the three NCUA Board members heard a quarterly report on the National Credit Union Share Insurance Fund (NCUSIF) that showed the assets of the fund grew significantly in the third quarter. However, that was largely because credit unions adjusted their deposits in the fund to be equal to 1% of insured shares. Total assets expanded to more than $19 billion from midyear, fueled largely by more than $1.5 billion injected by federally insured credit unions to adjust their 1% deposits.

Nevertheless, all three board members advised vigilance by federally insured credit unions going forward. NCUA Board Chairman Rodney Hood said the agency would take “all necessary actions” to ensure the fund remains strong and retains public confidence. “Vigilance needed to manage, monitor the situation.”

But NCUA Board Member Todd Harper agreed, saying that the agency must be “on guard” going forward. However, he noted that with rising assets, falling loan demand, compressed interest rates, decreased earnings and subdued consumer confidence under the pandemic-affected economy, credit unions need to be prepared for increased member delinquencies, loan defaults, bankruptcies and even credit union failures.

We have a number of higher-risk credit unions that we were already closely supervising,” Harper 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.”

He said because the insurance fund equity ratio will continue to drop and decline, “it is really not a question of whether we will charge an insurance fund premium, but a question of when.” He indicated the timing is uncertain for a premium – next year, or even the year after that. However, he said bluntly: “Credit unions need to brace themselves for that eventual reality,” adding later that charging a premium during an economic downturn is “less than optimal.”

Harper reiterated past comments about the need for the agency to work with Congress about modifying the way the agency manages the fund going forward. He noted the FDIC’s higher reserve requirements for banks, greater administrative flexibility, and the ability to charge risk-based premiums as ripe for consideration for NCUA and credit unions.

Board Member Mark McWatters took a similar tack to Harper’s, saying he remains focused on the equity ratio of the fund. Under federal law, the NCUA Board may charge a premium if the equity level of the fund drops below 1.3%; if the equity ratio falls below 1.2%, the law demands a restoration plan that include a premium to help bring the equity back above 1.3%

McWatters indicated he wants credit unions to be prepared – and recommended that NCUA modify its policy to present a transparent calculation of the equity ratio each month (rather than every six months), with a detailed analysis of the numerator and denominator of the fraction that describes the insurance fund equity. (As of now, the agency will next calculate the equity ratio based on Dec. 31, 2020, credit union financial results.)

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,” McWatters said. He added that the agency should also work with all constituencies to “address these critical issues in a transparent matter so as to mitigate the need for future premium assessments” in the context of the financial impact of the pandemic on CUs.

NCUSIF Financial Statistics For the Quarter Ended September 30, 2020