Banks were atypically mum about the National Credit Union Administration’s plan to fold a post-crisis emergency reserve into its share insurance fund.
Maybe they should take a closer look.
The proposal, approved by NCUA’s board on Thursday, will boost the share insurance fund’s equity ratio to 1.39% from 1.26% and will pay out as much as $800 million to credit unions early next year.
That cash will likely bolster those institutions’ net worth, the credit union industry’s version of capital ratios, providing more fuel for making loans, said Keith Leggett, a retired American Bankers Association economist.
“Getting $600 million to $800 million next year means credit unions will either add to their net worth ratios or pass the money along to their customers,” said Leggett, who blogs regularly about credit unions. “Either way, they’ll be more formidable competitors.”
The NCUA’s Temporary Corporate Credit Union Stabilization Fund wasn’t set to end until 2021, when the last assets once held by failed corporate credit unions were expected to be liquidated. The agency said cash from those assets and possible legal recoveries may allow it to refund another $1.1 billion in coming years.
The credit union industry’s net worth ratio has been declining. A $800 million injection next year, along with the prospect an additional $1 billion, would likely to reverse the trend.
Banks were largely bystanders when the NCUA sought comments, despite flooding the agency with comment letters on other issues, such as plans to overhaul member business lending and field of membership.
None of the 663 letters the NCUA received about the funds merger came from a bank source.
“There are only so many battles you can fight,” he said.
Still, banks could have argued for the NCUA to allocate more money from the $2 billion stabilization fund to strengthen the share insurance fund. In contrast to the NCUA’s 1.39% target, the Federal Deposit Insurance Corp. has a 2% equity ratio for its deposit insurance fund, with plans to increase it further, Leggett said.
NCUA Chairman J. Mark McWatters said the 1.39% equity ratio, which will serve as the share insurance fund’s normal operating level, will allow the NCUA to withstand the effect of a moderate recession without having to charge an assessment.
“In its current condition, the insurance fund’s equity ratio is ill-equipped to withstand even a relatively mild downturn in the economy,” McWatters said Thursday.
“We simply cannot ignore a weakening share insurance fund and the possibility of a recession in the near future,” McWatters added. “As much as I would like to declare a large dividend, that’s not what the objective criteria says.”
Roughly a year ago, McWatters, disturbed by the prospect of having to levy an assessment on credit unions to bolster the industry’s sagging share insurance fund, asked NCUA officials if money from the stabilization fund could be used — “borrowed” as he termed it — to replenish the insurance fund.
“We’re faced with a situation where our equity ratio is declining,” McWatters explained in a session with reporters Thursday. “It was going to lead to a premium for the credit union community. The credit union community would be assessed by a board vote and it would have to write a check.”
After its staff shot the loan plan down, the NCUA continued to explore ways to use the fund to shore up the share insurance fund. Eventually, after a year spent analyzing and researching the issue, a workable plan was found — namely the merger of the two funds.
“I thought maybe we could borrow some funds but that did not work out so well,” McWatters said. “Then came the idea of merging the funds together, negating the check-writing from the credit unions but then turning around and refunding some of the funds that they were forced to put into the stabilization fund during the financial crisis.”
NCUA officials realized the plan would be controversial. Credit unions, after all, contributed nearly $4 billion to the stabilization fund from 2009 to 2013. While the merger plan provides for a distribution to institutions of $600 million to $800 million in 2018, the NCUA would use a roughly equivalent sum to boost the share insurance fund’s equity ratio.
For McWatters, the funds merger proved appealing because it addressed two key issues; buttressing the share insurance fund at a time of economic uncertainty, while providing a rebate — albeit partial — to credit unions.
Still, for credit unions, the jump in the normal operating level came as a shock. Prior to Thursday’s vote, hundreds of credit union representatives wrote comment letters opposing the plan, arguing that the increase was too steep, with a few labeling it a “cash grab.”
In one-on-one discussions with credit union executives, McWatters and board member Rick Metsger said they were able to get their point across.
“When you explain it to them, my experience the last couple of months has been, they get it,” Metsger said.
A spokesman with the National Association of Federally-Insured Credit Unions, which opposed the plan, said Friday that the trade group had received “numerous messages from credit union CEOs who thanked it for the stance it took."
The association’s position was driven by its members, who objected to the increased normal operating level and the partial refund, the spokesman said.
With Thursday’s vote locking down the merger, the next issue involves setting the normal operating level. Credit unions have made it clear they want it reduced as soon as possible.
“The refund seems largely non-controversial. The controversial issue is what do you set this normal operating level at,” McWatters said. He and Metsger pledged to re-evaluate it regularly.
“Prudence would dictate that future boards assess this. … It will be as long as I’m around,” said McWatters, whose term ends in August 2019. “With even a modest holdover, I can say I have two years left on the board.”
“Staff does look at it on a regular basis,” Metsger added. “The board has the ability to do that at any time. Speaking from my perspective as well, that is the intent, to re-evaluate it as the window of uncertainty becomes a window of certainty.”