Over the past 30 years, the fund has operated above 1.20% without much difficulty. While it was not always an ideal situation—there have been premiums assessed—absent the corporate crisis, there was never any other event that remotely appeared to be a crisis.
As such, we have consistently expected the 2017 increase to be temporary, dropping back down to 1.30% when the corporate situation was unwound.
The crucial issue is the level the equity ratio should be to preclude the necessity of a significant premium during a time of economic stress for credit unions. The complete avoidance of future modest premiums with an elevated NOL is simply not necessary and arbitrarily leaves one of the main tools of equity ratio management—premiums—in the toolbox.
It has been slightly more than 30 years since the fund was capitalized in its current form, with credit unions contributing 1% of insured shares as capitalization deposits and the fund’s retained earnings making up the balance.
Since share insurance deposits are topped off each year at 1% of insured shares, maintaining the fund in its normal operating range required net income sufficient to keep the retained earnings of the fund between 0.2% and 0.3% of insured shares for most of this history.
The amount of net income required depends on the growth rate of insured shares. The primary source of fund income is interest earned on the fund’s total assets: the sum of the 1% deposits and retained earnings.
The other available source of income is a premium assessment. The two primary expenses of the fund are operating expenses and insurance losses.
For almost all its history, interest earnings have been sufficient to cover operating expenses and insurance losses and to keep retained earnings between 0.2% and 0.3% of insured shares. In fact, in the first 20 years of its operation, the fund had to pay a dividend seven times to avoid exceeding the 1.3% NOL.
Proposed changes to the insurance fund are solutions in search of problems.
In the past 10 years, the fund would have paid a dividend three times except for the fact the TCCUSF had an outstanding loan from Treasury, which requires that any excess over 1.3% be paid to the TCCUSF.
The fund has needed to impose a share insurance premium only three times since it was established in its current form: an 8-basis point (bp) premium in 1991 and respective 10.3 bp and 12.4 bp premiums in 2009 and 2010 following the Great Recession.
In summary, during the fund’s 30-plus-year history, it has paid a dividend approximately one third of the time while a premium has been required only 10% of the time.
It has never ended a year with an equity ratio of less than 1.20%. The lowest year-end ratio has been 1.23%, which occurred in 2009. On two occasions a premium was required to maintain the 1.20% ratio.
The past practice of NCUA has clearly been to levy an insurance premium only when not doing so would have left the fund with an equity ratio nearly at or below 1.21%.
For almost all its history, the fund’s NOL has been set at 1.30%, which also is the level above which Congress has stipulated that a premium cannot be charged. This strongly suggests that Congress believed a NOL above 1.30% was unlikely to be necessary.
Had Congress anticipated that an NOL above 1.30% might be likely, it would have granted the NCUA the power to charge a premium at equity ratios above 1.30%.
As stated in our 2017 letter to the NCUA, we supported a temporary increase in the NOL of 4 basis points (to 1.34%) to account for legacy asset volatility. Based on a variety of factors, we reiterate our call for the NOL to be returned to 1.30%, which has historically served the NCUSIF well.
The Winter 2023 issue of Credit Union Magazine explores award-winning marketing, board training on a budget, developments in instant payments, service to small businesses, and NCUA’s final rule on member expulsion.
