(July 30, 2021) Any discussion about the normal operating level (NOL) of the federal credit union share insurance fund must acknowledge that the actual equity ratio of the fund is inextricably tied to NCUA’s budget and the overhead transfer rate (OTR), NASCUS wrote in a comment letter this week.
Further, NASCUS wrote, if an elevated NOL is deemed necessary by the agency, NCUA should take steps to reduce the OTR, restoring millions of dollars toward maintaining the NOL and increasing the potential for distributions to stakeholders.
NASCUS was responding to a comment call by NCUA, issued in May, on the agency’s policy guiding determination of the NOL. Now, the NOL (the target equity ratio set for the insurance fund by the NCUA Board) is set at 1.38%. Under the law, the board may set the NOL at anywhere between 1.2% to 1.5%. If the equity level is greater than the NOL, the NCUA Board may vote to make a distribution back to credit unions of the equity in the fund above the NOL (as it did two years ago).
The agency said in May that its re-evaluation of NOL policy was prompted by two events: the current economic landscape (along with the impact of current forbearance programs ending, and likely evictions rising – both perhaps leading to loan underperformance), and pending events related to the corporate asset management estates and end of the NCUA Guaranteed Notes (NGN) Program. Staff noted then that the NOL will no longer have to take into consideration the NGNs after June, since the last of the notes will have been, by then, liquidated (which they were).
The agency sought comments in a variety of different areas, including when public comment should be sought when a change to the NOL is proposed, and the basis for evaluating the insurance fund’s performance.
NASCUS also wrote that it supported continuing the opportunity for stakeholders to participate in considerations of even modest 1 basis point adjustments to the NOL, as well as on the OTR and other adjustments or changes to the NCUSIF.
“Given the cost of maintaining the NCUSIF’s equity ratio at the NOL as determined by the NCUA Board is borne by credit union stakeholders, we believe the policy of notice and public comment before any change of 1 basis point or greater in the NOL should be maintained,” NASCUS wrote.
Writing that the state system supports a “counter-cyclical approach to funding the NCUSIF based on annual modeling utilizing scenarios developed by the Federal Reserve,” NASCUS stated that it supports a moderate recession as the model, with the use of the Federal Reserve baseline and adverse (when available) scenarios to test the model. “NASCUS encourages NCUA to factor into its modeling the historical performance of the NCUSIF and the credit union system to better calibrate the true needs of the SIF while returning as much money to credit unions as prudent for deployment in service of members,” NASCUS wrote.
But discussion of the NOL is not complete, NASCUS asserted, without admitting that the actual equity ratio of the SIF is inextricably tied to NCUA’s budget and the Overhead Transfer Rate (OTR).
“The simple fact is that NCUA has withdrawn over $1.7 billion from the SIF in the past decade ($1 billion of that in just the past five years) to fund agency operations,” NASCUS wrote. “Without question, the NCUSIF should fund its own administration and a robust supervisory program that identifies and mitigates material risk in the federally insured credit union system. But the fact remains that an elevated NOL, combined with the OTR, cannibalizes SIF investment earnings and denies credit unions SIF distribution opportunities.”
The association indicated that the agency should reduce the OTR, which would restore millions of dollars toward maintaining the NOL and increase the potential for distributions to stakeholders.
“Next to setting the OTR, establishing the NOL is one of the most consequential policy determinations administered by the NCUA,” NASCUS wrote. “Over the past several years, NCUA has taken steps to bring more transparency to the OTR and NCUSIF. NASCUS applauds and supports those efforts. We encourage NCUA to continue enhancing the transparency related to the accounting of the NCUSIF, the OTR, and modeling and factors contributing to the determination of the NOL.”