What if an NCUA proposal could reduce your credit union’s ROA from 3 to 8 basis points per year in perpetuity. Would you care? Would you even respond to NCUA’s proposal that had that implication?
This could be an outcome should credit unions fail to reply to NCUA’s request for comments on the policy process for changing the NCUSIF’s Normal Operating Level (NOL). The continuation of NCUA’s NOL financial modeling incantations and Chairman Harper’s desire to remove NCUSIF premium limits have one goal: collecting more credit union funds.
Comments due by July 26 can be filed here. Or mailed to: Melane Conyers-Ausbrooks, Secretary of the Board, National Credit Union Administration, 1775 Duke Street, Alexandria, Virginia 22314-3428
Three Urgent Points in Response
In previous articles I have documented how multiple NCUA decisions managing the fund have shortchanged credit unions. To return NCUA’s oversight of the fund to the best version of itself, three critical changes are needed.
- Convert all NCUSIF accounting to private GAAP from federal accounting principles. This should require the recognition of the full 1% deposit credit union contribution payable simultaneously with the reporting of insured shares when calculating the NOL. Also, all assets under management in AME’s should be audited and their financial data included.
- Discontinue NCUSIF financial decisions based on artificial models using hypothetical assumptions entirely disconnected from actual economic data and NCUSIF performance, which are then “projected” years into the future.
- Develop better management tools to forecast the current yearend NCUSIF outlook based on actual numbers and estimates from real events. The goal should be to manage the NOL in the normal range of 1.2 to 1.3.
Dividends should be paid when the fund exceeds 1.3. If unusual events such as a period of historically low interest rates necessitate a premium, that should be temporary to remain within the normal NOL range.
Credit unions should oppose NCUA’s current financial conjuring process for the NCUSIF’s NOL. Manage to the normal range. There are no objective facts supporting a change to the longstanding legal guardrails on the NCUSIF structure.
The Origins of the NOL Change
The questions in the Board’s May request show NCUA’s intent to continue modifying the Normal Operating Level cap in place since 1984. This first change was made in 2017. That board decision was based on financial fairy tales. The purported models used neither actual economic events nor 33 years of audited NCUSIF performance outcomes to change the longstanding 1.3 upper limit.
This 2017 decision occurred in the eighth consecutive year of positive economic growth and credit union stable performance. It was simply an opportunistic money grab to avoid the political embarrassment of a premium.
NCUA fabricated numbers to approve a 1.39 NOL four years ago so that the NCUSIF could keep more of the $2.6 bn surplus when merging the TCCUSF. If not raised above 1.3, additional dividends would have to be paid as required by the FCU Act.
Both board members publicly stated their approval was intended to retain these extra funds to avoid assessing a premium for the planned liquidation of the taxi medallion conserved credit unions. Most credit unions objected to the proposal, but NCUA did not modify a single number.
Another proof of this financial artifice is that prior NCUA boards saw no reason to modify this normal limit during or immediately after the 2008-10 Great Recession. The reason is simple, the NCUSIF worked as designed.
Carrying Forward a Fabrication
NCUA suggests continuing this financial fabrication process indefinitely.
The request for comments specifically lists criteria to “invent” moderate/severe recession scenarios with characteristics based on NCUA’s judgment, using “qualitative” factors, and extending these assumptions out five years, more or less. The most important factor of the fund’s financial “drivers” is omitted –the agency’s operating expenses from the Overhead Transfer Rate. In the past 13 years these expenses exceeded insured losses by $272 million.
This parody of a financial model was used at the December 2020 board meeting to justify retaining a 1.38 NOL. That staff presentation projected a decline (loss) in the NOL of 16 basis points in a “moderate” recession.
This “forecast” was given in the same year as the worst one quarter fall of GDP ever recorded due to the COVID economic shutdown in 2020. Despite this severe economic shock, the real NCUSIF outcome was that net cash recoveries exceeded insured losses by $10 million this past year. The “model” shown in December forecasted that the opposite should have happened—a big loss not a gain.
During the Great Recession years of 2008-2010, the NCUSIF’s cumulative loss rate on insured shares was only 2.8 basis points, a fraction of the 16 bps loss projection shown in December’s board presentation.
Every question listed in the NCUA’s request has an implied assumption that a larger and more frequent adjustment of the NOL outside the traditional 1.2-1.3 range from 1984-2017 is necessary. The 36 years of actual NCUSIF performance shows that managing within this NOL range is more than adequate for all economic cycles.
Financial Reporting Erodes Trust and Transparency
What makes the request even more problematic is NCUA’s use of misleading data to obscure the NCUSIF’s financial condition. NCUA states that NOL at 2020 yearend was 1.26%. The actual audited reserves to insured shares ratio was 1.318%. NCUA’s number fails to include the true-up of the 1% deposit on yearend insured shares–an accounting practice followed until 2001.
NCUA’s conversion to Federal GAAP standards in 2010 further confused the fund’s financial reporting. The NCUSIF’s “federal” accounting presentation of operating results is today converted by staff into a private GAAP income statement format for public reporting. The “federal” balance sheet includes unrealized investment gains and losses in the Cumulative Results of Operations (aka reserves) and omits all “fiduciary” assets in the AME’s including the billions in the corporate estates.
Federal accounting standards are inappropriate for a cooperative fund owned by credit unions.
The NCUSIF must return to private GAAP accounting principles for transparency, the same practice required for all credit unions. It is the standard used for NCUA’s other three funds: the Operating Fund, the CLF and Community Development Revolving Loan fund
The 36 years of actual NCUSIF performance shows this cooperative design works in all economic cycles and industry conditions.
Not a Resource Challenge
This ongoing effort to permanently change the fund’s long proven NOL structure inverts the real challenge facing the NCUSIF model; the shortfall is not financial resources, but how the fund’s problems and capital are managed.
The largest natural person losses are not the result of a macro economic cycle. The losses from the $239 million St Paul Croatian and the $40 million member shortfall in CBS Employees FCU were frauds carried out over many years, or decades.
The NCUSIF $750 million expense to resolve the taxi medallion conservatorships is an example of a fire sale to be rid of problems versus creating more cost-effective resolution options. Why expense $750 million to end its responsibility for taxi medallion borrowers when its own conservators reported shortfalls of only $250 million in the credit union’s final call reports?
Write Now to Sustain NCUSIF’s Financial Soundness
For four years, NCUA has kept this NOL pantomine alive. Meantime, the arc of NCUSIF performance continues creating a significant cooperative advantage for the system versus the FDIC’s model.
So far the only posted comment is from Mid Oregon CEO Kevin Cole. He states the key issue clearly in his close:
For many credit unions, participation in the NCUSIF is the biggest, largely unmanageable risk they face. . .Because this risk is tied to actions of the NCUA Board and ultimately, other credit unions, individual credit unions have limited tools to manage the risk. .
The NCUSIF through the actions of the NCUA Board has the authority to assess credit unions’ premiums as needed to restore the fund’s equity ratio as needed. For this reason, it is not necessary or desirable for the NOL to be any higher than it absolutely needs to. Share insurance fund reports indicate that most credit unions are well capitalized and pose little risk to the NCUSIF. The credit unions with higher risk levels to the NCUSIF appear to be properly identified and working towards resolution, as evidenced by the low number of failures that cost the fund.
For the simple reason that the NCUSIF has the authority and the ability to assess credit unions as needed, and credit unions have the means to pay, it makes no sense for the NCUSIF to hold more equity than legally required, except for identified probable losses. The capital belongs to credit union members and should be allowed to be deployed as those members wish.
Please add your voice to Kevin’s.