Forecasting the 2010 NCUSIF Premium
The premium, assessed later this year, likely will be 6 bp to 10 bp.
Last year, the National Credit Union Administration (NCUA) announced that the combined assessment for corporate credit union stabilization and the National Credit Union Share Insurance Fund (NCUSIF) premium would total between 20 and 40 basis points (bp) of insured shares.
NCUA recently announced the assessment, which leaves the important question of what the NCUSIF premium will be.
NCUA announced an assessment of 13.4 bp of insured shares to cover this year’s portion of the seven-year program to pay for corporate stabilization. The estimated total cost of stabilization: between $6.5 billion and $7.5 billion. But the actual amount—which will depend on eventual losses on the troubled securities held by a few of the corporate credit unions—won’t be known for a few years.
The 13.4 bp assessment will provide $1 billion toward the full cost of the program. Credit unions can reasonably expect similar assessments for another two or three years, at which time the actual amount of the losses should be largely known. The final two or three payments could be adjusted accordingly.
This fall, NCUA will announce the regular 2010 NCUSIF premium, which must be sufficient to bring the NCUSIF’s ratio of equity to insured shares to an acceptable level. The fund’s equity includes credit unions’ 1% deposits and the fund’s retained earnings.
Historically, NCUA has managed the ratio in the range of 1.25% to 1.3%. Last year, NCUA levied a premium sufficient to put the ratio at the top end of that range. Since then, because of significant reserving for insurance losses, the equity ratio has fallen to 1.22%, and is likely to fall even further, to around 1.19%, by the time NCUA assesses the premium.
Given the current and expected economic climate, credit unions’ financial condition, and the outlook for additional insurance losses during the coming year, an acceptable level for the equity ratio right after the premium would be about 1.25%.
This analysis assumes that while the worst of the recession is behind us, credit unions still are likely to face strong earnings headwinds for the next couple of years. Also, additional credit union failures (hence, NCUSIF insurance losses) are likely.
The fund has already established a significant reserve of $1.1 billion for these future losses (similar to a credit union funding its allowance for loan losses). So a 1.25% equity ratio should be adequate to begin the next year.
If credit union failures in the coming few months are worse than expected, the fund’s equity ratio could fall below 1.19%, perhaps as low as 1.15%. Assuming the 1.25% target level, that would require a premium for 2010 of 6 bp to 10 bp. This is in the lower end of the 5 bp to 25 bp range (excluding the corporate stabilization assessment) that NCUA announced last year.
Adding in the stabilization charge (13.4 bp) would mean a total assessment for the year of between 19.4 bp and 23.4 bp.
CUNA analysis has identified credit unions most adversely affected by the recent financial crisis and recession. These credit unions are the most likely to fail and cause NCUSIF losses in the next year and a half.
CUNA’s base case analysis estimates total actual losses from these credit unions of about $1.2 billion, which is only marginally above the $1.1 billion NCUSIF already expensed for insurance losses. An optimistic case scenario suggests total actual insurance losses of $700 million, which would imply that no additional reserving for insurance losses is necessary.
In a pessimistic case, total actual insurance losses would be $2.2 billion. In that scenario, a premium of up to 15 bp would be required in 2011, in addition to this year’s premium of 6 bp to 10 bp. That would put the combined, two-year premium near the top of the previously announced range of 5 bp to 25 bp for this year.
For the full analysis, visit cuna.org, and enter “estimating the 2010 NCUSIF premium” in the search box.
BILL HAMPEL is senior vice president of research and policy analysis/chief economist for the Credit Union National Association. Contact him at 202-508-6760.