During the Nov. 19 National Credit Union Administration board meeting, board member Todd Harper
Harper noted that the National Credit Union Share Insurance Fund equity ratio had fallen to 1.22% of insured shares as of June due to rapid deposit growth. This is just above the 1.20% threshold. If the equity ratio falls below 1.20%, NCUA must charge a premium.
Harper stated that credit union failures are likely to be above average over the next couple of years and the current low interest rate environment has depressed the NCUSIF’s investment income. This is creating a scenario where NCUA will have to levy new premium assessments on credit unions to keep the NCUSIF from slipping below 1.20%.
Given the specter of new premium assessments, the time is now for some reasonable reforms to the NCUSIF to grant NCUA greater flexibility in managing the NCUSIF and avoid draconian premiums.
Congress should remove the statutory cap from the NCUSIF equity ratio. Under current law, the normal operating level for the NCUSIF is set between 1.2% and 1.5% of insured shares. But NCUA concluded in a 2013 National Credit Union Share Insurance Fund Improvements White Paper that “the NCUSIF needs an equity ratio of at least 2% to provide an asset base that would better enable the NCUSIF to withstand the types of pressure that arose during the recent financial crisis and recession.”
The agency estimated that the NCUSIF equity ratio needed to be at 2.17% of insured shares to prevent any depletion of a credit union's 1% NCUSIF capitalization deposit during the financial crisis and subsequent recession.
In addition, the NCUA cannot by statute charge a premium if the NCUSIF equity ratio exceeds 1.3%. This prohibition on charging a premium needs to be eliminated. This would allow the NCUSIF to build reserves during good times and allow credit unions to avoid paying large premiums during economic downturns.
Congress should also amend the Federal Credit Union Act to enable NCUA to calculate premiums paid by insured credit unions based on assets minus net worth, rather than insured shares. Basing premiums on total assets minus net worth would better account for the risks posed by highly leveraged credit unions to the NCUSIF. Shifting premiums to an asset minus net worth assessment base would result in a greater share of premiums being paid by larger credit unions and corporate credit unions, while the premium burden for credit unions with less than $1 billion in assets would fall.
Furthermore, Congress should change the Federal Credit Union Act to enable the NCUA board to develop a risk-based premium system for credit unions. Under current law, NCUA is required to assess NCUSIF premiums using a uniform percentage applied to the amount of insured deposits held by a credit union.
Moving from a proportional to a risk-based premium system would increase both fairness and incentives for credit unions to operate safely. It would end the cross subsidization of riskier and poorly managed credit unions by stronger, less risky credit unions.
Finally, the funding of the NCUSIF should transition from the 1% capitalization deposit to risk-based premium system. This 1% deposit can be expensed over several years resulting in no out-of-pocket cost for credit unions.
The industry should work with NCUA to implement these reasonable reforms. These reforms would give the NCUA greater flexibility in managing the NCUSIF and avoid the pro-cycle character of the insurance fund.
