ALEXANDRIA, Va.–After the nation’s credit unions saw a near quarter-trillion inflow in deposits during 2020, members of the NCUA board held a briefing on an interim final rule related to capital adequacy and Prompt Corrective Action (PCA), with members of the board and agency staff discussing what credit unions can expect moving forward, including thoughts on a potential NCUSIF premium.
During the board meeting an update was provided on the interim final rule the board approved last week that is substantially similar to the one previously adopted in May 2020 and which expired Dec. 31, 2020.
The rule change made two short-term changes to PCA:
- It temporarily reduces the earnings retention requirement for federally insured credit unions classified as adequately capitalized. While the rule is in effect, credit unions unable to meet the earnings retention requirement will not have to submit a written application requesting approval to decrease their earnings retention.
- It temporarily permits an undercapitalized credit union to submit a streamlined net worth restoration plan if it becomes undercapitalized primarily because of share growth. If a credit union becomes less than adequately capitalized for reasons other than share growth, it must still submit a net worth restoration plan under the current requirements in our regulations.
The new rules sunset on March 31, 2022.
Watching NCUSIF Equity Ratio
NCUA Chairman Todd Harper said the agency is paying particular attention to factors related to the NCUSIF equity ratio and whether any premium will need to be charged to boost the ratio.
“Just as we are seeing downward pressure on the net worth ratios of federally insured credit unions,the inflow of share deposits resulting from three fiscal stimulus packages and changes in consumer behavior resulting from the COVID-19 pandemic are affecting the equity ratio of the Share Insurance Fund,” noted Harper. “Normally around this time of year pursuant to our statutory responsibility, the NCUA board would consider the staff’s six-month projection of the equity ratio. Because the equity ratio projection has real consequences, my fellow board members and I believe it is important that the projection be as accurate as possible.”
Increased Uncertainty
Harper said the pandemic’s impact on the economy and the government’s related fiscal response has increased uncertainty related to key drivers of the equity ratio, especially insured share growth, and as a result the board has determined it is “prudent to undertake additional analysis for the projection,including reviewing the first quarter call reports of federally insured credit unions.”
As for the interim final rule, Harper said the CU system in 2020 experienced an increase of $242 billion, or 19.8%, in insured shares and deposits compared to year-end 2019.
“For many credit unions, this extraordinary share growth was even larger. I recently spoke to the CEO of a small credit union who said the assets of his institution grew 57% during the last five quarters because of the unprecedented share growth,” said Harper.
Harper said the extended relief period will help CUs “focus their limited resources on serving their members’ needs — especially those of modest means and those disproportionately affected by the pandemic — instead of planning for earnings transfers and developing detailed net worth restoration plans.”
Hauptman: ‘Hot Money’ & Premiums
NCUA Vice Chairman Kyle Hauptman said he and NCUA understand the reasons for the share growth, which he dubbed “hot money,” noting the funds are like the tides and will flow out again.
“In 2020, collectively, regular shares, share drafts, and money market accounts grew at a rate five times greater than in 2019. This has implications for credit union net worth ratios as well as the Share Insurance Fund’s equity ratio,” Hauptman said. “ I realize the specter of an insurance premium is weighing heavily on the minds of most credit unions. Of course, safety and soundness of the insurance fund is of the utmost importance. But I would like to remind everyone that should the Share Insurance Fund equity ratio dip below 1.2%, NCUA is not required to immediately charge a premium.”
Hauptman reminded NCUA is required to develop a fund restoration that which restores the fund to 1.2% within eight years, a point frequently raised by NAFCU.
The FDIC Model
“Our colleagues at the FDIC recently went through this process and took a measured approach that reflects, in my opinion, the reality of the current situation,” said Hauptman, who advocated following the FDIC’s approach to monitoring its insurance fund.
The FDIC’s restoration plan’s assumptions, said Hauptman, were based on a range of reasonable estimates of future losses and a return to normal insured deposit growth rates.
“It’s worth noting that in 2020, credit unions provisioned for loan losses at an $8.5 billion annual rate, which represents $1.22 for every dollar of delinquent loans,” Hauptman said. “Credit union loan delinquency was 60 basis points, down 10 basis points from one year earlier.”
The vice chairman called for a “reasonable approach to a potential Share Insurance Fund restoration plan and temporarily providing relief from prompt corrective action requirements (that) allow credit unions to maintain focus where it belongs, on serving members.”
Hood: ‘We Need This Tool’
NCUA Board Member Rodney Hood said he remains concerned over credit unions that may temporarily fall below required capital minimums.
“While this temporary relief wasn’t widely utilized last year when it expired, it now appears we need this tool for credit unions,” said Hood, adding he believes the temporary final rule temporarily streamlines the regulatory requirements for prompt corrective action without introducing undue risk consistent with the NCUA’s responsibility to maintain the safety and soundness of the credit union system.
In response to a question from Hood on how many credit unions used the streamlined net worth restoration plan made available by NCUA, staff said as of Sept. 30, 2020 89 credit unions had done so.
‘We Must Be Truly Transparent’
Speaking to the equity ratio of the NCUSIF, Hood said he has been told that as a result of the 1% “true-up” credit unions must pay the agency will receiving nearly $867 million based on credit union’s December 2020 insured shares total.
“In addition to this 1% deposit, we maintain total fund equity between the 1.2% of insured shares and the normal operating level cap, currently set at 1.38%. Generally, outside this range we must develop a restoration plan or pay a dividend,” said Hood. “If a premium or a dividend is necessary, we must be fully transparent in presenting the fund’s financial position. Currently, the equity ratio we report is accurate, but there is a timing difference in reflecting the true-up--the contributed capital by credit unions. This can be a significant number, especially in this unusual period of share growth. As reported, the current timing difference of this true-up can create confusion in the credit union community, Congress, and the general public.
“With the effects of the pandemic, I think it is appropriate that the NCUA board temporarily consider adjusting the Normal Operating Level back down to 1.30. If we experience or project greater credit union losses than anticipated, this can be revisited down the road,” said Hood.