A banking industry blogger recently used a Freedom of Information Act request to obtain—and then publicize—a 2013 NCUA white paper focused on “improvements” to the National Credit Union Share Insurance Fund (NCUSIF).
The white paper suggests three major changes to the NCUSIF’s operation and structure. Specifically, it recommends legislation that would allow the agency to:
The good news: NCUA has not made seeking legislation to implement the white paper’s recommendations a major priority. Gaining authority to examine credit union vendors appears to be much higher on the agency’s legislative priority list.
It’s worth noting, however, that recent NCUA congressional testimony contained a footnote referencing one of the suggested changes: risk-based insurance premiums.
The really bad news: the fact that the agency considers these changes even remotely necessary or desirable, especially increasing the size of the insurance fund’s equity ratio.
Particularly troubling are the frequent references in the paper indicating the need to make changes similar to those recently put in place for the Federal Deposit Insurance Corp. (FDIC), which insures bank deposits. This is a continuation of the agency’s recent trend of copying bank regulation and supervision.
Of course, credit unions are not banks. They do not operate like banks. The cooperative ownership structure of credit unions significantly dampens their appetite for risk compared to banks. And the historical performance of the NCUSIF compared with the FDIC clearly demonstrates this.
The FDIC has twice become insolvent in the past 25 years during financial crises, while the NCUSIF—in its current form—performed extremely well, maintaining its equity ratio in the 1.2% to 1.3% range.
This was accomplished with only modest insurance fund premiums compared with those the FDIC charged during the same periods. Given this divergence in performance, it’s baffling that NCUA would recommend changes to make the NCUSIF more like the FDIC’s Bank Insurance Fund.
Because of the FDIC’s troubling performance during the latest financial crisis, the Dodd- Frank Act made several changes to the agency’s structure and operations. The FDIC board has adopted a policy of increasing the Bank Insurance Fund ratio from its historically typical level of around 1.2% of insured deposits to 2%. This will require banks to pay substantial deposit insurance premiums for more than a decade.
Similarly, to increase the NCUSIF’s equity ratio from the current 1.3% of insured shares to the white paper’s suggested 2% in 10 years would require annual insurance premiums of eight to nine basis points (bp)—or about $850 million in the first year and then rising as assets grow. These premiums would come right out of credit union bottom lines.
Such a huge drain on credit union earnings would be totally unnecessary. NCUA’s white paper derived the 2% equity ratio goal as the amount necessary to protect credit unions’ 1% share insurance deposits from being depleted in the case of losses similar to those generated by the five corporate credit unions that failed during the latest crisis.
This analysis misses two very important points:
Having learned a very costly lesson, corporate credit unions now operate under a rule so restrictive that their assets have shrunk from about $130 billion in 2006 to less than $20 billion today.
It’s next to impossible to imagine a scenario in which natural-person credit unions could generate the sorts of losses that would require a 2% NCUSIF ratio.
And, of course, under the current 1.3% ratio, even that substantial of a loss would not bankrupt the fund. Instead, it would require credit unions to expense the write-down of a significant portion of their 1% deposits—painful but effective.
Another of the white paper’s proposals would base premiums on total assets less net worth, as opposed to insured shares (i.e., assessing premiums against total shares and liabilities).
The logic behind this change is that a credit union with more uninsured shares and liabilities compared with another would have more assets and, therefore, more risk exposure.
While there’s something to that logic, the fact remains that only insured shares are insured. And data on credit union failures over the past nine years doesn’t support the view that credit unions that tend to fund their balance sheets with something other than insured shares are more likely to fail.
Currently, the dollar-weighted average ratio of the proposed assessment base to insured shares for all credit unions is 111%. The similarly computed average among credit unions that failed, the year before their failure, was just two points higher at 113%.
This is another example of an NCUA proposal that has little apparent justification, but mimics an FDIC approach.
Finally, the idea of assessing insurance premiums on the basis of risk has merit. But the devil is in the details.
If risk premiums were established on the basis of Call Report data, they would likely be largely redundant to the risk-based capital approach. Credit unions that would be subjected to higher premiums would already be required to hold more capital.
If premiums were based on CAMEL ratings, as the FDIC’s system largely is, they could further weaken already troubled credit unions by making them pay higher premiums.
Creating an appropriate risk-based premium system would be very difficult and probably not worth the cost, especially given the infrequency with which NCUA must charge premiums.
While it’s somewhat comforting that implementing the white paper’s recommendations appears to be quite low on NCUA’s to-do list, we stand ready to oppose major aspects should it come to the forefront.
BILL HAMPEL is CUNA’s chief economist and chief policy officer. Contact him at 202-508-6760 or at email@example.com.