WASHINGTON–Although he was not able to be present at a House hearing on oversight of the prudential regulators due to back surgery, NCUA Chairman Todd Harper did submit a statement in which he offered updates on CU performance, where concerns lie, AI and more.
The comments were submitted in advance of a hearing by the House Committee on Financial Services that included representatives of the Fed, the FDIC and the OCC. A similar hearing is scheduled for the Senate today.
In response to Harper's written statement, America's Credit Unions' Chief Advocacy Officer Carrie Hunt issued a statement saying, "Chairman Harper has missed an opportunity to tell policymakers all the good work that credit unions are doing across the country to help consumers and small businesses thrive. Instead, the chairman is pushing an agenda of overregulation, making it difficult for credit unions of all asset sizes to operate efficiently for the 140 million Americans they serve. His testimony made several broad assertations without any supporting data. America’s Credit Unions is committed to sharing far and wide that the credit union industry is strong, safe, and sound.”
A Decline in ROAA
In his written statement, Harper said CU performance during 2023 was “mixed due to increased market competition and rising interest rates.”
He noted credit unions of more than $500 million in assets posted a decline in the aggregate return on average assets stemming from deposit competition and increased use of wholesale funding, while CUs below that threshold have a more stable deposit base that mitigates the cost of funding increases. “In general, credit union liquidity appears to be stable, but the NCUA is seeing signs of stress linked to the current interest rate environment,” Harper said in the statement. “This financial stress is reflected in the increasing number of credit unions with a composite CAMELS code rating of 3, 4, and 5.1 Assets in institutions with a composite CAMELS 3 rating increased from December 2022 to December 2023, especially among large, complex credit unions with greater than $500 million in assets.2 Credit unions with composite CAMELS 4 and 5 ratings remained relatively stable during 2023.
“Year over year, credit unions with a liquidity component rating of three nearly doubled. Just over three hundred credit unions experienced a decline in the liquidity component rating from a 1 or 2 to a 3, 4, or 5. Additionally, during 2023, the number of credit unions with a high liquidity risk rating tripled.”
Other Issues
Other issues touched on in Harper’s statement include:
Credit Union System Performance
Harper noted that as of year-end 2023, FICUs’ aggregate net worth ratio was 10.95%, an increase of 17 basis points over the year.
“There was continued year-over-year growth in assets and lending, albeit at a slower pace, with the credit union system’s total assets surpassing $2.2 trillion and total loans outstanding reaching more than $1.6 trillion,” Harper stated.
Funding costs for credit unions have increased significantly, with interest expenses growing substantially over the year, Harper told the committee. He also noted CUs have doubled its credit loss provision expense from $5.5 billion in 2022 to
$11.3 billion in 2023.
External Factors Credit Unions
Harper said NCUA is closely monitoring the economic landscape, and that overall CUs have “modest exposure” to the strains being felt in commercial real estate.
Artificial Intelligence
Artificial intelligence “offers both promise and peril” to credit unions, Harper said.
“The NCUA’s goal is to maximize and deliver on the former while identifying and mitigating the risks of the latter,” the letter states. “Consistent with the Executive Order on the Safe, Secure, and Trustworthy Development and Use of Artificial Intelligence, the NCUA is in the early stages of researching, assessing, and developing plans to address opportunities and risks associated with AI tools.”
Share Insurance Fund Performance
Harper told Congress the share insurance fund now insures $1.7 trillion in share deposits, and that there were $161.4 billion in uninsured deposits at year-end 2023 or 8.6% of total share deposits.
“The Share Insurance Fund continues to perform well, with no premiums currently expected. As of Dec. 31, 2023, the Share Insurance Fund reported a year-to-date net income of $209.7 million, a net position of $21.2 billion, and an equity ratio of 1.30 percent, which is sufficient but below the 1.33% normal operating level target set by the NCUA board,” Harper said.
State of the Central Liquidity Facility
As of Dec. 31, 2023, the CLF had 407 consumer credit union members, providing $20.2 billion in lending capacity, Harper said. “These credit unions range in asset size from less than $50 million to more than $10 billion. The CLF helps protect approximately $370 billion in credit union assets. The more members the CLF has, the more effective it is as a liquidity facility,” Harper wrote.
Efforts to Protect and Strengthen the CU System
“In the past few months, the NCUA has taken actions to respond to cybersecurity risk; enhance consumer financial protection; support minority depository institutions; improve the credit union system’s and the NCUA’s diversity, equity, inclusion, and accessibility efforts; and has considered rulemaking activities that strengthen the system,” Harper stated.
Cybersecurity
Harper told Congress NCUA’s recently implemented cyber incident reporting rule has proven “helpful” to the agency and credit union industry. As of March 2024, the total number of incident reports is just under 1,000, Harper said.
“The data collected has significantly improved our capacity to identify trends, vulnerabilities, and potential risks that could affect the entire sector’s cybersecurity. This, in turn, has allowed us to develop strategies to enhance cyber resilience across the board,” Harper stated.
Additional Requests
In addition to other updates, Harper again called on Congress to give the agency third party vendor examination authority, to approve a proposed statutory change that would restore the ability of corporate credit unions to serve as CLF agents on behalf of a subset of their member credit unions, to amend the FCU Act to remove limitations on the Share Insurance Fund’s equity ratio and ability to assess premiums, and to increase grant assistance for the Community Development Revolving Loan Fund.
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