Dennis Dollar
WASHINGTON—Dennis Dollar says NCUA’s “flat-tax” NCUSIF premium system is working fine, and that NCUA’s interest in risk-basing the premium is a “solution looking for a problem.”
In fact, suggested Dollar, there is no need to move to a risk-based premium structure, as that’s exactly what’s in place now.
NCUA last week asked Congress for the authority to charge risk-based NCUSIF premiums. (NCUA Looking At Risk-Based NCUSIF Premiums). The request appeared in a footnote of NCUA Director of Examination and Insurance Larry Fazio’s written testimony delivered to the Senate Banking, Housing and Urban Affairs Committee. Fazio testified before the committee during a hearing on regulatory relief for community banks and credit unions.
In that footnote, number 29 on page 14, NCUA states: “NCUA has two other legislative priorities . . . The second priority would permit NCUA to charge risk-based premiums for the Share Insurance Fund much like the Federal Deposit Insurance Corporation charges for the Deposit Insurance Fund. Risk-based premiums would lessen the funding burden on small credit unions, which generally pose less risk to the Share Insurance Fund.”
Unlike the FDIC deposit fund, credit unions keep 1% of their deposits on deposit with the NCUSIF, which is mandated by Congress to maintain a reserve ratio of 1.30%.
Solution Looking For Problem
“While RBC has some value in making sure that credit unions have sufficient reserves to cover the risk on their balance sheet and protect the insurance fund, the idea of risk basing the premiums to the insurance fund itself seems to be a solution looking for a problem,” said former NCUA chairman Dollar. “The NCUSIF is already risk based in that the credit unions with the highest level of assets contribute the most to the fund, and those with the least assets contribute the least.”
The Dollar Associates principal noted that the NCUSIF is operating at 1.3% and has maintained itself “solidly” above 1.2% throughout the entire financial crisis.
“Never has the taxpayer had to directly bail out the NCUSIF with an infusion of cash,” observed Dollar. “The NCUSIF is a working flat-tax system that the banks are quite jealous of. Credit unions with a billion-dollars in assets are required to contribute 1% of insured deposits, as do those with $10 million. It is already based on the amount of potential risk to the fund.”
Dollar pointed out that if a credit union grows deposits, there is naturally more risk to the fund, so that credit union has to contribute 1% on the deposit growth each year.
“Credit unions with growing deposits unarguably bring more risk to the fund by that increase in insured deposits, but they also bring more required contribution to the NCUSIF—at the flat 1% tax rate of the current system, if you will—based upon that growing deposit base. The system has worked extremely well, and it seems that tinkering with a successful formula is unnecessary at best—and possibly damaging for credit unions at worst.”
Dollar shared concern that credit unions are already facing the loss of some of their capital cushion due to the risk-based capital proposal.
“But, for those who see the value in a well-calibrated RBC system, it is at least justified by that additional capital being an increased reserve that provides protection to the insurance fund,” said Dollar. “To now require the insurance fund itself to be risk based and—on top of RBC—to increase the amount of the NCUSIF deposit likely through some application of the RBC formula to the insurance premium calculation will provide another hit to credit union capital cushions.”
Fewer Dollars For Strategic Investments
The additional reserves required by RBC rule and the additional NCUSIF deposit required under some type of risk-based premium formula would leave even fewer dollars available for credit union strategic investment in products, service and technology, contended Dollar.
“The cumulative impact of both RBC and a risk-based NCUSIF premium formula on the ability of credit unions, who presently can only build capital through retained earnings with no supplemental capital option, to invest in member service will be significant as it relates to the ability to remain competitive with much larger banks and financial service providers.”
Dollar expects CUs will be concerned about a congressional effort toward risk-based NCUSIF insurance premiums, “when the present system has worked so well for decades and survived the financial crisis in great shape."
“In my view, risk-based NCUSIF premiums—unless incorporated into a very comprehensive capital modernization plan with a well-calibrated RBC system that has appropriate triggers, supplemental capital options and greatly expanded FOM growth opportunities to foster the growth necessary to build the additional capital and premium dollars—will trigger a major battle on Capitol Hill with credit unions calling it a solution in search of a problem,” said Dollar.