Some developments over the past few months will have a major impact on the National Credit Union Share Insurance Fund (NCUSIF).
First, in November 2016 the NCUA board advised credit unions to budget for a possible share insurance premium in 2017 because it expected the fund ratio to fall to 1.25% by year’s end.
Rapid share growth and low interest earnings on the fund’s Treasury investments will drive the decline. NCUA viewed 1.25% as too far below the fund’s 1.3% normal operating level.
We were surprised by the premium announcement because the agency previously had only imposed a premium when the fund’s ratio approached 1.2%, not 1.25%. We expressed this concern in a white paper.
Second, in December NCUA provided positive news on the outlook for the Temporary Corporate Stabilization Fund: The latest estimate (as of September 2016) for the total cost of the corporate resolution had fallen to around $6 billion from the $15 billion estimated in 2010.
Because credit unions have paid more than $10 billion in stabilization assessments and depleted capital in the conserved corporates, they will receive at least $4 billion in refunds.
Third, in May NCUA reported two more settlements with mortgage bankers, with net proceeds of more than $500 million—raising the likely refunds to more than $4.5 billion.
The refunds will come in two forms: replenishment of depleted capital and assessment rebates.
The assessment rebates, which will comprise the majority of the refunds, won’t come directly from the stabilization fund. Instead, they will occur as NCUSIF dividends after the stabilization fund is merged into the share insurance fund.
So, when will two funds be merged?
Most of the borrowing in the form of NCUA Guaranteed Notes that has funded the legacy assets of the corporates won’t mature until 2020 and 2021. But the two funds can be merged before then.
Doing so would immediately cause the share insurance fund to recognize some, but not all, of the growing surplus in the stabilization fund, boosting the fund ratio.
NCUA Mark McWatters announced at CUNA’s 2017 Governmental Affairs Conference that his top priority was to merge the two funds this year if possible.
McWatters has since reiterated that intention in public meetings. The only holdup would be any legal or accounting issues that arise.
NCUA staff haven’t found any insurmountable hurdles, but they have yet to complete their analysis.
Assuming the merger occurs this year, there will be an increase in the share insurance fund ratio of slightly less than 20 basis points (bp), from 1.25% to 1.43%.
Normally that would require a dividend of 13 bp to return the fund ratio to its normal operating level of 1.3%.
But merging the two funds would mean NCUSIF would hold some less-than-prime legacy assets in addition to its normal Treasury securities. That could expose the fund ratio to more volatility.
As a result, the agency is likely to temporarily raise the normal operating level from 1.3% to somewhere in the range of 1.36% to 1.38%, although we at CUNA believe it can safely be lower than that.
That would allow for a share insurance dividend next year of 5 bp to 7 bp, with the prospect of additional dividends totaling as much as 20 bp over the following three years as further recoveries on the corporate stabilization are realized and the normal operating level returns to 1.3%.
Capital replenishment likely will not occur until 2021.
The expected merger of the two funds removes the need for a share insurance premium this year.
In fact, even if the merger is delayed until next year, the prospect of a significant boost to the fund ratio from the future merger means an insurance premium this year isn’t necessary.
In any event, credit unions shouldn’t plan for a premium this year.
BILL HAMPEL is CUNA’s chief economist and chief policy officer. Contact him at 202-508-6760.