ALEXANDRIA, Va. – The number of credit unions with a composite CAMELS code 3, 4, or 5 rating has increased as a result of rising interest rates, which has created liquidity pressures on some CUs, the NCUA board was told by agency staff during its board meeting here.
The only item on the meeting agenda was the state of the National Credit Union Share Insurance Fund as of Sept. 30. The board was updated by agency CFO Eugene Schied.
The Share Insurance Fund reported a net income of $26.2 million, $20.2 billion in assets, and $73.7 million in total income for the third quarter of 2022. The equity ratio for the Fund remains at 1.26%, the same as it has been in prior quarters.
According to the presentation made to the board:
- The number of composite CAMELS codes 4 and 5 credit unions increased 2.6% from the end of the second quarter, to 120 from 117. Assets for these credit unions increased 2.7% from the second quarter to $3.8 billion from $3.7 billion.
- The number of composite CAMELS code 3 credit unions increased 1.7% from the end of the second quarter, to 768 from 755. Assets for these credit unions increased 7.6% from the second quarter to $47.9 billion from $44.5 billion.
- At the end of the third quarter of 2022, there were four federally insured credit union failures that cost the Share Insurance Fund $7.0 million in losses.
Potential ‘Headwinds’
“Unfortunately, the Share Insurance Fund report this quarter also shows another side of rising interest rates with an increase in the number of credit unions with a composite CAMELS code 3, 4, or 5 rating,” Chairman Todd Harper said. “Additionally, several credit unions have experienced liquidity issues recently, including some with more than $1 billion in assets. And, with ongoing inflationary pressures and continued interest rate increases likely, the potential for headwinds slowing the economy and increasing stress on households and financial institutions continues to grow.
“The NCUA board will continue to monitor trends and developments in the economy, financial markets, and credit unions, Harper continued. “If any issues arise, the board will also be ready to take action to protect credit union members and the Share Insurance Fund.”
Hauptman: Again Calls for Extending Expanded CLF Authorities
In his comments following the presentation to the board, Vice Chairman Kyle Hauptman noted that “Many economic forecasts suggest an increased risk of a downturn on the horizon. I want to remind everyone that this country and credit unions have weathered recessions in the past. Downturns are normal and so is preparing for them.”
Hauptman said the increase in unrealized losses is “not a surprise,” adding that holding investments to maturity ensures the returns to the fund.
“It also means that losses remain unrealized and do not impact the fund’s equity ratio – that’s good news. But that requires careful planning of the share insurance fund’s liquidity needs. We must be careful to ensure liquidity levels are sufficient enough to cover sudden changes to avoid or minimize selling investments at a loss,” Hauptman said. “The share insurance fund must remain ready to pay claims in a downturn.”
Hauptman also used his remarks to again urge that the expanded authorities that were granted by the CARES Act in 2020 to the Central Liquidity Facility be extended. That authority currently expires at year-end.
“If the provision is not extended or made permanent, we expect a reduction of $9.7 billion in reserve liquidity for the credit union system – including the share insurance fund -- due to the corporates withdrawing their funds,” Hauptman said. “That’s a $9.7 billion buffer between the credit union system and the American taxpayer. NCUA will continue to communicate this to Congress.”