ALEXANDRIA, Va.–All the good economic times are coming at a potential cost: credit unions may need to pay a premium to shore up the National Credit Union Share Insurance Fund (NCUSIF).
During the NCUA board meeting Thursday, agency staff said a combination of factors have come together so that “we’re at a point now where the equity ratio has started to drop.”
The NCUSIF’s equity ratio is currently 1.27%. The FCU Act sets a floor of 1.20% before credit unions must pay a premium based on their deposits to boost that ratio. The Act also sets a top-end ratio cap of 1.50%, after which CUs are to be paid a refund. But the NCUA board previously set a desired ratio level of 1.30%, which the current board has the option to change. The NCUSIF currently insures just below $1 trillion in credit union members’ shares.
Should the current board vote in favor of a premium to increase the ratio it might not need to come in 2017, although it could vote on such an increase sometime next year and then set the premium for the following year.
Larry Fazio, director of the Office of Examination and Insurance, said a confluence of factors is forcing NCUA to make a decision. While deposits have been growing steadily at credit unions in recent years, losses to the fund have been below projections, and with those funds moved back into the NCUSIF’s reserves, it helped to offset the inflow of deposits against which credit unions must hold their own 1% deposit with the insurance fund
“These reversals of insurance loss reserve fundings have largely offset declines in the equity ratio that otherwise would have occurred,” explained Fazio. “This is not expected to continue to be the case, given relatively low level of loss reserves at this point.”
Another factor is also playing a role: NCUA invests the NCUSIF based on 10-year laddered terms, meaning the higher rates it was earning eight and 10 years ago are now rolling off and into a lower rate environment, reducing interest income. Running a number of forecasting models for the next 12 to 18 months, even in a best-case scenario NCUA staff see little likelihood the equity ratio will crater and then reverse itself.
“In all scenarios it’s a downward trajectory due to low rates and increasing share growth,” said Fazio. “It won’t correct itself other than through premiums assessed on credit unions if trends continue. Going forward, holding all other variables constant, insured shares would need to decline 2.5% each of next five years just to hold the equity ratio steady.”
Using what he called a middle road forecast, Fazio said NCUA projects the NCUSIF equity ratio will fall below the statutory minimum of 1.20% within five years and below 1.25 within two years.
NCUA staff told the board a three to six basis point premium will likely be necessary to boost the fund to 1.30%, and that the board will have to decide in February or July of 2017 (when operating fee notices are sent to CUs) whether or not to move forward. Staff told the board it does not expect an assessment will need to be paid in 2017, and that the board further has the authority to reset the target equity ratio.
NCUA last assessed an NCUSIF premium in 2010.
NAFCU, saying it acknowledges that certain factors have resulted in a downward movement in the equity ratio for the share insurance fund recently, urged NCUA to "exercise caution" in assessing a premium in 2017, only doing so if it is deemed absolutely necessary.
"Given the fact that NCUA is forecasting a three to six basis point premium for the share insurance fund next year, NAFCU urges the agency to redouble its efforts to refund monies to credit unions to offset any additional costs as soon as possible,” said NAFCU President and CEO Dan Berger. “As for the corporate stabilization fund, NAFCU will continue to advocate for rebates to credit unions prior to 2021. We strongly encourage the agency to thoroughly examine and consider all options for doing so.”
For more details on NCUA's NCUSIF projections, visit CUToday.info's The gov.