A tale of two funds
Both of the federal deposit insurance systems have been significantly damaged during the recent financial crisis. As a result, both will have to impose significant assessments on their insured institutions over the next several years to restore their funds.
BIF’s current reserve ratio stands at a negative 0.15% of insured deposits. By law, the ratio must be restored to at least 1.35% by 2020, a total difference of 1.5% of insured deposits. It’s the restoration of the reserve ratio that will require the significant assessments in the coming several years.
Following a recently announced premium of 12.42 bp, NCUSIF’s current reserve ratio is at 1.29% of insured shares. Since 1.3% is the normal operating level for the fund, premiums over the next few years will only be necessary to maintain rather than to replenish the fund.
However, NCUA will have to collect substantial assessments to pay for the estimated $8.1 billion remaining cost of the Corporate Stabilization Fund.
The primary cost for credit unions insured by NCUA will be to pay for the Corporate Stabilization Fund. Assuming the $8.1 billion expected cost is straight-lined over the 11-year life of the fund, the annual assessment would be $736 million.
The assessment rates for Corporate Stabilization assume an annual assessment of $736 million and that insured shares grow by 5% a year. Future premiums for the NCUSIF are assumed to be quite small as the fund is already at its normal operating level of 1.3%.
As is the case for FDIC, NCUA has already accumulated a substantial reserve for future insurance losses based on information about the current condition of credit unions. However, because credit unions are still under stress, there are likely to be some additional, not-yet-reserved losses at natural-person credit unions in the coming year or two.
Also, low interest rates on Treasury securities will depress the earnings on the Fund’s investments. We estimate the resulting premiums will be around 5 bp in 2011 and 2012.
Projections of future FDIC and NCUA assessments are just that: estimates. They’re based primarily on FDIC’s and NCUA’s current expectations about future losses from failed institutions and the performance of the Stabilization Fund’s legacy assets.
They are probably based on fairly conservative estimates of economic growth—a long, slow economic recovery over the next several years.
If the economic recovery is weak, or even slows to a double-dip recession, future assessments at both funds will be greater.
But if the economy surprises on the strong side, current expectations of future losses will turn out to have been excessive, and future assessments at both funds will be less than anticipated.
BILL HAMPEL is CUNA’s chief economist/senior vice president of research and policy analysis. Contact him at 202-508-6760.