NCUA recently released its semiannual update on the Corporate Stabilization Fund. Of note is the “Q&A on Costs and Assessments” at ncua.gov, which the agency began posting several years ago at CUNA’s urging.
From the update, we can conclude that credit unions can look forward to substantial refunds of the costs they paid as the corporate credit union crisis unfolded. But that won’t happen soon.
Between 2008 and 2012, credit unions paid $10.4 billion as a result of the failure of five corporate credit unions: $5.6 billion as extinguished capital at the corporates and $4.8 billion as assessments paid by all federally insured credit unions.
In 2012, the projected range of total losses to the fund was $13.9 billion to $16.1 billion. Had those estimates held up, credit unions would still be on the hook for $3.5 billion to $5.7 billion in additional assessments.
Fortunately, the fund’s condition has improved substantially since then. NCUA’s latest estimates for total losses have fallen to the range of $7.2 billion to $8.8 billion, and further improvement is likely.
Therefore, instead of facing additional assessments, credit unions can expect refunds in the range of at least $1.6 billion to $3.2 billion.
The improvement is due to three factors:
1. Dramatic improvements in the economy and housing market. Most of the troubled assets the corporates held were mortgage-backed securities, which have recovered substantially.
2. Successful lawsuits against many of the investment banks that packaged subprime mortgages into the securities the corporates bought.
The $1.6 billion to $3.2 billion excess assessment range (as of last December) includes $2.5 billion in legal settlements. Since then, NCUA has recovered millions more, which will further boost the rebate total.
3. NCUA’s overestimation of the extent of the losses. The sheer size of the overestimation looks huge with 20/20 hindsight.
But those were scary times, and the agency had to follow basic accounting rules, which require loss estimates to err on the high side.
A similar set of rules caused credit unions to dramatically overestimate their loan losses and overfund allowance accounts during the same period. There was no negligence or malfeasance; just conservative application of lousy accounting principles.
The returns to credit unions could be as high as 30 basis points (bp) of current assets, or upwards of 30% of the total stabilization cost. They will be distributed in part to former capital holders and in part to all credit unions as assessment rebates.
That’s the good news.
The bad news is credit unions are unlikely to see any of this money until 2021, when the fund expires. NCUA explains that liquidating the assets before then would reduce the amount of the payout.
This raises an interesting question: Why can’t credit unions book receivables now and record the income for at least a portion of the future rebates?
After all, accounting principles require recording an expense at the first hint of a potential future loss (I exaggerate just a little). Remember how loan and investment losses were recognized during the Great Recession—then later reversed when the losses didn’t materialize?
The Financial Accounting Standards Board’s CECL (current expected credit loss) proposal will require lenders to book distant estimated future losses when loans are originated. It’s a pity that accounting rules aren’t symmetrical and won’t allow any recognition of what will almost certainly be large gains a few years down the road.
In this situation, I think credit unions would be justified to knock off 20 bp or so from what they would otherwise consider to be their long-term capital ratio goals, at least until 2021. You can always restore the goal once you’ve been allowed to record the income.
A final note: I like accountants. It’s just accounting I can’t stand.