A Tale of Two Insurance Funds: NCUSIF vs. FDIC
Costs will be 60% greater to replenish bank fund than for NCUSIF.
Coverage ratios (total equity in each fund divided by insured shares or deposits) have fallen for both funds from 2007 to 2010, but more so for the bank fund.
From their standard operating coverage ranges in the neighborhood of 1.25% (where both had hovered since 1995), the FDIC has plummeted well into negative territory. The NCUSIF has taken on the corporate stabilization fund, which leaves it sharply reduced, although still positive.
The cause in both cases was the financial crisis followed by a very deep recession. Some of the challenges have been shared by both funds. For example, very low interest rates have depressed yields on the investments held by each fund.
In normal times—prior to 2007—interest on the assets owned by the funds was sufficient to cover all operating expenses and the minimal deposit insurance expenses. Recently, that has not been the case, and premiums have been necessary at both funds.
Although there have been increased insurance losses at both funds, these losses have been much greater for FDIC than for NCUSIF. Despite significant FDIC premium assessments over the past few years, its fund ratio has dropped from 1.22% at the end of 2007 to a negative 0.28% as of June of this year.
Although there has also been an increase in natural person credit union insurance losses at NCUSIF, the premium assessments of the past two years have been sufficient to keep the fund ratio at the top of its normal range, at 1.3% of insured shares.
The big hit to credit unions hasn’t been NCUSIF losses at natural person credit unions. Instead, it has been losses at some of the corporate credit unions that are being paid through the corporate stabilization fund.
Under the just announced legacy assets plan, the remaining cost of the corporate stabilization will be $8.1 billion, to be paid over the coming 11 years.
This is based on a $15 billion estimate of the future credit losses on the troubled assets from the five corporate credit unions that have been conserved.
Subtracting $5.6 billion of depleted corporate capital and $1.3 billion of assessments already paid leaves the $8.1 remaining cost.
Next: Fund ratios
It’s important to note that once the recently announced premium of 12.4 basis points (bp) is collected, the NCUSIF coverage ratio will be 1.3%. The corporate stabilization fund is a separate fund.
However, because credit unions will have to pay for the stabilization fund with assessments based on insured shares, it’s useful to consider the NCUSIF fund ratio net of the corporate stabilization obligation. This allows an apples-to-apples comparison of the relative future burdens on credit unions and banks to replenish their funds.
The $8.1 billion estimated remaining corporate stabilization cost is equal to 1.06% of insured shares in credit unions. Subtracting that from the 1.3% NCUSIF fund ratio leaves a combined or “adjusted” fund ratio of 0.24% of insured shares.
Over the next 11 years, credit unions will have to pay sufficient assessments to get the “adjusted” fund ratio back to around 1.25%. That amounts to about 1% of current insured shares.
By contrast the FDIC fund ratio is currently at negative 0.28%, and Congress recently mandated a new target for it of 1.35%. Over the next seven years, banks will have to pay an amount that’s 1.63% of current insured deposits.
Recently it has been difficult to compare FDIC and National Credit Union Administration (NCUA) assessments because the FDIC risk-based formula is much more complicated than NCUA's, and it has been changing lately.
Comparison is also complicated by there being two types of NCUA assessments: share insurance premiums and corporate stabilization assessments.
However, the total amount (relative to current insured deposits) that each type of institution will have to pay over the next 10 or 11 years is quite clear: 1.63% for banks and 1.07% for credit unions.
If the $8.1 billion corporate stabilization cost were evenly spread over 11 years, next year’s assessment would be approximately 9.2 bp of insured shares. Unless conditions at natural person credit unions deteriorate substantially over the coming year—and they appear to have stabilized—the NCUSIF premium is likely to be around 5 bp.
A 5 to 10 bp range would be conservative. Rounding up that means a combined cost next year of 15 bp to 20 bp.
After that, assuming no significant recession, the NCUSIF premiums should be largely behind us, and paying off the remaining estimated stabilization cost would average around 7 bp of insured shares a year for the following 10 years, assuming aggregate share growth of 5% over the period.
Next: Front-loading assessments
NCUA has suggested there may be a need to slightly front-load the stabilization assessment next year for liquidity reasons. CUNA has encouraged NCUA to meet any short-term cash management needs with borrowing rather than higher assessments.
However, if a stabilization assessment greater than 9.2 bp is necessary for some reason next year, a strong case could then be made for letting the NCUSIF ratio float around 1.25% rather than 1.3%. That would require a 5 bp smaller premium, still meaning a likely combined cost in the range of 15 to 20 bp next year.
Also, if a greater than 9.2 bp assessment is charged next year, future assessments would be lower by the amount of any excess charged next year.
The estimates of future assessments of 1% of current insured shares for credit unions and 1.6% of current insured deposits for banks are driven less by actual losses already taken and more by estimates of future expected losses.
The FDIC fund ratio of negative 0.28% is based both on actual bank failure losses taken thus far and on an estimate of future losses from bank failures. Those future losses are estimated on the basis of the current number and condition of troubled banks.
For NCUSIF, the 1.3% ratio is based on similarly calculated and estimated losses at natural person credit unions. The corporate stabilization estimate (the $8.1 billion) is based on estimates of the future performance of the legacy assets, which will depend on the future course of the economic and housing recoveries—most of the corporates’ troubled assets are private label mortgage-backed securities.
If the economic recovery is stronger than most people expect, losses at both FDIC and NCUSIF will shrink, and lower assessments will be required. However, if we experience a severe double-dip recession, the losses will increase and even greater assessments will be required at both funds.
There’s a good chance the remaining corporate stabilization costs will end up being less than $8.1 billion. NCUA’s previous estimates of the cost of the corporate stabilization, made last year, were based on total losses on the legacy assets of somewhere between $10.5 billion and $12 billion, not the $15 billion used for the legacy asset securitization.
Press reports suggest that the expected performance of the sorts of securities that make up the legacy assets have, if anything, improved slightly over the last year. At the very least, it would be very unusual for them to have deteriorated significantly.
Indeed, the total Other Than Temporary Impairment (OTTI) charges taken against the legacy assets at the five conserved corporates as of June amounted to $11.7 billion. Because OTTI is subject to a ratchet effect (if estimated losses rise they must be expensed, if estimates fall, they can’t be recovered until the security repays), accumulated OTTI charges, if anything, overstate actual likely losses.
These factors all suggest that the $15 billion estimate is likely based on very conservative (pessimistic) assumptions. This was likely necessary to secure Treasury’s approval of the deal.
This is not to say that credit unions can count on a total cost of less than $8.1 billion. It could conceivably be even more than that.
However, there’ a significant probability that the ultimate remaining cost will be closer to $5 billion than $8 billion. We won’t know this until late in the remaining 11-year life of the stabilization program.
If the losses are lower, the assessments will end sooner than 2021.
For both federal deposit insurance funds, we can hope for an improvement in the economy so costs are reduced. However, in any event, per dollar of insured deposits, the amount that FDIC insured banks will have to pay to restore their fund over the next several years is significantly greater than what credit unions will have to pay to NCUA.
BILL HAMPEL is CUNA’s chief economist. Contact him at 202-508-6760.