Paying Off NCUSIF To Take 11 Years

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WASHINGTON-A new analysis suggests credit unions will be paying the cost of rebuilding their deposit insurance fund in the wake of both natural-person and corporate CU failures for at least another 11 years.

If there is any silver lining in the white paper released last week by CUNA, it is that while CUs have been hit hard by the assessments being charged by NCUA, those charges have been 25% lower than CUs would be paying were member deposits FDIC-insured.

The paper reported that the FDIC's assessments levied since the beginning of 2008 have totaled 47 basis points (BPs) of total deposits, equivalent to 52 BPs on insured deposits. Over that same time period, the paper said, NCUA's total assessments have totaled 41 BPs of insured shares.

Not Good News
The paper suggests both NCUA and the FDIC will be charging significant assessments on their insured institutions to restore their funds, respectively, in the coming years. CUNA is projecting NCUA will be charging combined assessments for both NCUSIF premiums and corporate stabilization that will likely average eight BPs per year until 2021, for a total of 90 BPs. Over that same time period, CUNA is projecting the FDIC's assessments will total 144 BPs. The white paper includes a caveat noting that the assessment estimates are derived from the NCUA and FDIC's current expectations regarding future losses from failed institutions and the performance of various legacy assets.

The assessment projections for credit unions represent the lagging fortunes of the failed corporate credit unions. The paper notes that of the five corporates placed into conservatorship, roughly $50 billion of legacy assets will be funded by $35 billion of guaranteed notes, with final maturities ranging to 2021. "This funding is based on expected ultimate credit losses of around $15 billion on the $50 billion of legacy assets," the paper states. "Of the $15 billion of estimated losses, $6.9 billion has already been paid ($5.6 billion from extinguished capital at the five conserved corporates and $1.3 billion paid by credit unions in previous assessments this year and last year.) That leaves $8.1 billion yet to be paid by credit unions (to be assessed by NCUA) over the remaining term of the Corporate Stabilization Fund. Because the notes funding the legacy assets will have maturities to 2021, the remaining term of the Corporate Stabilization Fund was extended from five to eleven years."

If the economic recovery is slower than expected, or stalls completely, future assessments will be higher than these projections, CUNA stated. However, a stronger than expected recovery could reduce these future assessments, the paper added.

Primary Cost: Corporate Stabilization
"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 white paper reports. "The assessment rates for Corporate Stabilization in the table below 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 BPs in 2011 and 2012."

"We are now facing the highest deposit insurance assessments for banks since the early 1990s, and for credit unions since the NCUSIF was capitalized in its current form in the early 1980s," said Bill Hampel, CUNA's chief economist, in a statement. "This is the unfortunate consequence of the worst financial crisis in the U.S. since the 1930s."

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