By Ray Birch
WASHINGTON—Not much is being said about the possibility of NCUA making changes to the formula it uses for NCUSIF assessments, and experts are mixed on why all fronts are quiet on the topic now.
In April, Keith Leggett first reported on his blog the existence of a 2013 NCUA white paper that recommends that Congress reform the NCUSIF. According to the white paper, NCUA is seeking to establish higher thresholds for the operating level of the NCUSIF, the authority to assess risk-based premiums, and remove the statutory 1.5% equity ratio cap. Under the proposal, the NCUSIF assessment base would change from insured shares and deposits to total assets minus net worth.
Sources with whom CUToday.info spoke, on and off the record, as to why this matter is not being openly discussed now among credit unions and the trade groups suggested that no one wants to bring attention to a white paper that could potentially negatively impact credit union earnings. The agency has not said it will pursue the guidelines shared in the white paper written two years ago (see story at right), but Leggett believes NCUA is mum on the topic because it is working quietly behind closed doors in Washington to gain a sponsor for a bill to support the changes.
Leggett, who recently retired from the American Bankers Association, feels that is the biggest reason credit unions have not heard more about this from NCUA.
“What I understand is that NCUA is tweaking its proposal now and talking with members of Congress,” said Leggett. “Clearly, since we have not seen a bill introduced, NCUA is having some difficulty finding a sponsor. Again, since this will take an act of Congress, NCUA would like to do this quietly rather than publicly.”
Shopping Reform To Washington?
If NCUA is in fact shopping its proposal on Capitol Hill, Leggett feels some of the difficulty the agency might be facing now in obtaining a sponsor stems from how credit unions and the trade associations have been beating up NCUA over the revised risk-based capital proposal.
“This is speculation, of course, but that could be a reason members of Congress may be hesitant to sign on now,” said Leggett.
Keith Leggett
According to calculations made by Leggett, who reviewed NCUA Call Report data, 456 natural-person credit unions would see their portion of the NCUSIF assessment base increase as of the end of 2014 (click here for Leggett's list).
“This would mean these credit unions would pay higher deposit insurance premiums, if assessed and the aggregate premium payments are revenue neutral,” said Leggett. “All other credit unions would either see a reduction or no change in their share of the NCUSIF assessment base.”
Leggett called the steps outlined in the white paper “appropriate reform. I have always contended that the flat-rate premiums credit unions are assessed is not the appropriate model, and that deposit insurance premiums should be risk-based, as is the case with banks. Riskier institutions should pay higher premium rates than safer institutions.”
Generally, the reform outlined in the white paper will fall more heavily on larger CUs, assessed Leggett. “There will be some smaller ones that will see an increase in their assessment base, but as general rule this hits larger institutions harder.”
Large CUs Hit Hardest
The nation’s largest credit union, Navy FCU, would see its share of the assessment base climb from 4.62% to 5.66%, according to Leggett. Pentagon FCU would go from 1.38% to 1.60%.
“In many ways this is very similar to when the FDIC shifted the cost of funding its insurance fund to the larger banks, benefitting primarily community banks,” said Leggett. “The same thing will take place here.”
One source asking for anonymity believes that if NCUA is moving forward to change the structure of NCUSIF assessments and at the same time is not being transparent about its plan, should changes ever be made credit unions will not have had the appropriate time needed to make long-term plans to adapt their business models to address the higher premiums.
NAFCU, when asked about its stance on the possible move by NCUA to alter the NCUSIF assessment structure, referred CUToday.info to the letter the trade association sent to NCUA shortly after Leggett’s blog post.
Dan Berger, NAFCU
In the letter NAFCU President and CEO Dan Berger pointed out that idea of the agency establishing risk-based share insurance premiums was “buried in a footnote of NCUA’s February 10, 2015, congressional testimony before the Senate Banking Committee.”
Open Discussion Needed
Berger went on to discuss how such a shift—which would have a significant impact on the movement—should be openly discussed with credit unions.
“We are deeply concerned that the agency’s recommended changes would give NCUA authority unparalleled to any other banking agency . . . The agency justifies these requests in an effort to more closely align the operations of the NCUSIF with the Deposit Insurance Fund administered by the Federal Deposit Insurance Corporation,” wrote Berger. “NCUA, however, also wants to retain the ability to require credit unions to maintain one percent of their insured shares in the NCUSIF. The FDIC does not mandate insured banks to maintain a minimum deposit based on their insured shares.
“While NCUA’s recommended changes give the appearance of parity with the Deposit Insurance Fund, NCUA is seeking to layer risk-based insurance premiums on top of credit unions’ existing 1% NCUSIF deposit,” continued Berger. “Banks are only assessed a risk-based premium. Banks do not pay a Deposit Insurance deposit based on their insured shares. As a result, NCUA’s recommended changes would actually give the agency authority beyond that of the FDIC, and would potentially require credit unions to pay more than banks for the deposit insurance coverage.”
Leggett, who predicts that this reform will happen in 2017, feels that NCUA will give credit unions enough time to provide appropriate input, as well as time needed to prepare their business models for the change—just as the FDIC did with banks when it changed to a risk-based system for its deposit insurance fund.
“But clearly, it would probably be better for credit unions if NCUA would be having some dialog with them now about this,” he said.
Leggett has a theory as to why NCUA might want to raise the normal operating level of the NCUSIF well above the current 1.3% of insured shares.
“One of the key issues is that the regulator never wants to have to go back to Congress and again ask for additional authority regarding the
Peter Duffy, Sandler O'Neill
structure of the NCUSIF, ask for time to recapitalize the fund or borrow more,” said Leggett. “The NCUA wants to build the fund to the level that’s needed to ensure they never have to go to congress again.”
CU Capital At Risk
Peter Duffy, managing director at Sandler O'Neill, New York, said his firm is speaking to credit unions about the possibility of NCUSIF reform and how it could impact them.
“We became aware of the proposed changes to the insurance fund, and because Sandler O’Neil, on a daily basis, talks to CUs about strategic alternatives as well as issues related to capital, we made this issue part of our discussions,” said Duffy. “By doing so we are helping credit unions consider and prepare for any changes that may occur, not only changes to the insurance fund but also those that come from RBC.”
From a capital perspective, Duffy is concerned for CUs with what may be on the horizon. Noting CUs often face a lack of “meaningful” merger opportunities, most do not have access to secondary capital, goodwill is subtracted in risk based capital, and potential NCUSIF reform looms that might raise the fund’s operating level to above 2%, Duffy said CUs may someday find themselves in a tough position versus banks.
“All combined, this puts credit unions in a less-competitive posture versus banks in the way they can grow as merger transactions have begun to increase among banks,” asserted Duffy.