October 19, 2022
Senior Vice President of Policy and Supervision John J. Kolhoff
Vice President of Legislative and Regulatory Counsel Nichole Sebron
Good afternoon, Chairman Harper, Vice Chairman Hauptman, and Board Member Hood, on behalf of the National Association of State Credit Union Supervisors (NASCUS) and its members, thank you for holding today’s briefing on the NCUA’s proposed 2023 budget.
This represents the seventh year since NCUA has resumed public budget briefings. Over time, this annual dialogue has enabled NCUA stakeholders to provide insight and NASCUS welcomes the opportunity.
NASCUS has historically held the position that generally, a regulatory agency is in the best position to know the resources it needs to maintain a safe and sound supervisory program. We will leave it to other system stakeholders to opine on the prudence of NCUA’s proposed budget request for the ensuing year. Our comments today will address tangential, but important, issues related to how NCUA allocates the cost of its operations and presents its analysis of the cost burden borne by credit unions to fund supervision.
Impact of the State Supervisory Programs to the SIF
The 45 NASCUS State Regulator members are the prudential regulators of all 1,915 state-chartered credit unions across the country and their 64 million members representing half of the assets and members in the domestic credit union system. NCUA, and the Share Insurance Fund (SIF), benefit tremendously from the contributions of state regulators, and that state supervision is, in turn, almost exclusively funded by state credit unions: not the SIF, nor NCUA. Based on NCUA’s own public call report data, federally insured state-chartered credit unions reported paying $86.3 million in state operating fees in 2021 to ensure robust, independent oversight throughout the country. These monies funded thousands of examiner hours, and numerous reports that in many cases provide NCUA with the only onsite perspective of an institution it may see over a period of several years.
We raise this point because NCUA’s budget justification illustrates what it purports to be the relative costs borne by state and federal credit unions to fund supervision; without recognition of the savings afforded the NCUA budget by the application of state resources. This is most evident when the budget notes that state credit unions pay only 31.2% of NCUA’s operating budget with a footnote mildly acknowledging state credit unions pay a supervisory fee to their state regulator. In the narrow context of NCUA’s budget funding, this is of course true. But it does a disservice to the material expense borne by state credit unions to fund supervision relied upon by the SIF and presents a misleading picture of the true expense allocation impacting the Fund.
The recognition of the impact of the state supervisory program, and the related cost carried by state credit unions, takes on added relevance when considered in the context of the Overhead Transfer Rate methodology.
OTR Methodology Does Not Recognize the Impact of the State Supervisory Programs
The overhead transfer rate (OTR) is often overlooked by credit union stakeholders as it results not from an expense item every year, but from lost opportunity cost, both in interest income and capital held, as a result of the deposits held by the NCUA as part of deposit insurance funding.
However, every dollar transferred from the SIF by the Overhead Transfer to fund NCUA expenses is one dollar unavailable to cover losses in the system and lost future income to the SIF.
Further, the Overhead Transfer, if not handled prudently, has the potential to imbalance the dual charter system by disadvantaging the state system through unbalanced cost allocations, that artificially minimize the cost of the federal charter.
On the state side, the work done by state regulators directly benefits the SIF, reducing its administrative costs, and maximizing funds available to cover losses or generate revenue to be repaid to all insured credit unions. Through the current Overhead Transfer methodology however, the cost benefit with respect to federal charters works in reverse: the SIF absorbs costs for supervising federal credit unions and the benefit flows to the federal charter.
To be clear, costs associated with administering the Fund should be allocated to the Fund. That is what Congress intended when it established the SIF. But a plain reading of the Federal Credit Union Act demonstrates that Congress envisioned the SIF maximizing efficiencies gained by relying on examination work conducted by NCUA and the states to the fullest extent possible to reduce the administrative costs borne by the Fund.
We would be remiss to not recognize that the OTR declined in the proposed budget justification for 2023. We commend NCUA for taking this step. However, additional work remains to better calibrate the OTR methodology and ensure the management of the SIF is equitable to all charters. NASCUS remains committed to working with NCUA to identify improvements to the calibration of the OTR.
NCUA remains a strong partner of the state regulatory agencies in maintaining a safe and sound credit union system. We also recognize the tremendous amount of effort NCUA has undertaken to develop a modernized examination and supervision system, and to work with state regulators on numerous working groups and task forces to strengthen both state and federal supervisory programs.
It has been an honor to provide these comments to you today. I, the NASCUS Regulator Board, NASCUS Credit Union Advisory Council, NASCUS staff, state credit union regulators, and our credit union and system stakeholders thank you for your collegiality and commitment to collaborate on forging robust federal and state systems. Together, our dual credit union systems are stronger and better positioned to serve and protect consumer-members with strong and viable charter options. Thank you.