Would a credit union ever seek members’ advice on its capital level? For example, should the net worth range be held at the “well capitalized” level of 7-8%? Or raised to match the industry average, currently 10.5%? Or, in this time of recovery, add an extra 1% for unforeseen risks such as the COVID shutdown of 2020?
It would be highly unusual, even unique, for credit union to do this. Now NCUA has asked credit unions to provide this guidance for the NCUSIF. In May, the board approved a request for comment from credit unions for setting the normal operating level (NOL). That ratio, expressed in basis points, determines the retained earnings over and above each credit union’s 1% capital deposit.
Deadline is July 26
This could be the most important action credit unions take to shape the future of their unique cooperative fund. This decision is so consequential that this week’s blogs will focus only on this topic. Using the fund’s data from 2008-2013, I will provide background, facts and a dynamic Xcel spread sheet to help credit unions in their responses. The comment period closes in just two weeks on the 26th.
All comment letters are available here. To date only one is posted.
The Issue
The traditional range of the NOL ratio has been the 1% deposit plus another of .2 to .3% in fund reserves. In 2017 the Board raised the NCUSIF’s upper NOL limit to 1.39%, supposedly as a temporary measure after merging the TCCUSF’s assets and contingent liabilities. That top limit was reduced to 1.38 in 2020.
The NOL top limit had always been 1.30 from 1984 until 2017. All fund balances above this cap must be paid to the fund’s credit union owners as a dividend. That is the legal requirement as outlined in NCUA’s comment request: “The Insurance Fund’s calendar year-end equity ratio is part of the statutory basis to determine whether the NCUA must make a distribution to insured credit unions. The Act states “the Board shall effect a pro rata distribution to insured credit unions after each calendar year if, as of the end of that calendar year . . . the Fund’s equity ratio exceeds the Normal Operating Level.”
For example for six consecutive years, 1995 through 2000, the NCUSIF paid over $500 million in dividends as the year-end equity ratio continually exceeded the 1.3% cap.
At December, 2020, NCUSIF’s $4.665 bn retained earnings were .318% of yearend insured shares of $1.468 tr. If the NOL cap had been 1.30 (not 1.38) credit unions would have received a dividend of $264 million.
Chairman Harper Has Stated His Views
Before becoming Chair, Todd Harper was outspoken in his admiration and desire to bring FDIC’s revenue options to the NCUSIF. He repeated this in a statement, NCUSIF Improvements, before the House Financial Services Committee in May, 2021. Here is an excerpt of his views:
“ . . .under current law, the NCUA does not have the appropriate flexibility necessary to manage the Share Insurance Fund in a manner consistent with the growing size and complexity of the credit union industry, as well as with broader national financial stability goals.
To address these concerns, the NCUA . . . requests the following legislative changes:
- Increase the Share Insurance Fund’s capacity by removing the 1.50 percent statutory ceiling on its capitalization;
- Remove the limitation on assessing premiums when the equity ratio exceeds 1.30 percent, granting the NCUA Board discretion on the assessment of premiums; and
- Institute a risk-based premium system.
These recommended changes, if enacted, would allow the NCUA Board to build, over time, enough retained earnings capacity in the Share Insurance Fund to effectively manage a significant insurance loss without impairing credit unions’ contributed capital deposits in the Share Insurance Fund. Moreover, these changes would generally bring the NCUA’s statutory authority over the Share Insurance Fund more in line with the statutory authority over the operations of the Deposit Insurance Fund.”
Harper Seeks More Credit Union Money
Each basis point above the traditional cap of 1.3 is easy to calculate in dollars. With insured shares approaching $2.0 trillion, a single basis point adds $200 million to the fund.
Harper’s statement contains no facts or analysis supporting his legislative recommendations. His logic is only to cite the FDIC, a very different financial model. The bank’s fund has been insolvent several times since the NCUSIF redesign in 1984 ending the credit union’s premium-based system.
The reason Congress changed the FDIC’s operations in the 2010 Dodd-Frank Act was because it failed again in the 2008/2009 crisis. Congress kept the same design and as typical of a government solution, mandated that FDIC just collect more money from banks.
Harper posits three NCUSIF shortcomings: it is not sufficiently funded for times of stress; there needs be greater flexibility in financial management; and pricing should not be the same for every credit union–credit unions with more risk should be paying more. The bottom line is he wants to collect more money via premiums , an option now limited by law by the 1.3% cap.
The Real NCUSIF Failing
All three changes asserted by Harper are without supporting documentation. An analysis of the past thirteen years includes the two most recent financial crises and suggests a very different shortcoming. The NCUSIF has not lacked total resources, liquidity, or financial flexibility (premiums) but rather verifiable processes to estimate loan losses. For both specific and general loss provisions, NCUA has repeatedly overfunded the allowance account by hundreds of millions.
The most catastrophic example of this failing is NCUA’s estimates when initiating five corporate liquidations in September 2010. The projected credit union funded deficit from NCUA, versus actual outcomes to date, are more than $20 billion in error.
In later blogs, I will give examples of these loss exaggerations. These errors are even more pronounced when staff presents its modeling options to the Board in its annual NOL review.
NCUA’s efforts to remove these legal guard rails–NOL caps, mandatory dividends, external audits, limits on premiums—were anticipated. Spending more money is the default government solution. The NCUSIF and its co-op partner the CLF were tools to resolve problems collaboratively with the industry, not expense them away via liquidations.
Credit unions were put on notice by Chairman Callahan that the fund was now theirs, but they would have to monitor just like any investment.
The NCUSIF is Successful Despite NCUA’s Misjudgments
The strength and flexibility of the NCUSIF’s underwriting design has so far held against the agency’s habitual over-expensing ethos. There is a second concern. The accounting presentations are not provided in a timely, consistent and transparent manner-especially during high stakes decisions. A tool like the NCUSIF is only as effective as the quality of the data provided users.
Further blogs this week will cover these two issues and others:
- The Problems converting from private GAAP to federal GAAP in NCUSIF accounting. The importance of restoring private GAAP FASB accounting practices so the fund’s financial presentations are accurate, consistent and understandable.
- Facts versus fictions. How the NCUSIF’s 2008-2020 financial performance validates its financial design and the different approach in NCUA’s modeling outputs.
- Every Credit union’s NCUSIF calculator. This spread sheet is a simple, easy to use tool, that anyone can use to forecast the NCUSIF’s annual outcome and estimate whether a premium or dividend is probable at yearend.
- Raising Your Voice. Preparing Comments in light of the agency’s response to credit unions in 2017 when the cap was first raised above 1.30.
These blogs will provide interested persons historical context and the most recent data to review when submitting their responses.