Knowing the past is essential to understanding the present and charting the future. This is true for individuals, institutions and society.
History provides us with a sense of identity. People, social movements and institutions require a sense of their collective past that contributes to what we are today.
This knowledge should include facts about our prior behavior, thinking and judgement. Such information is critical in shaping our present and future.
The NCUSIF’s Transition Story
The NCUSIF legislation was passed by Congress in October 1970 authorizing a premium based financial model imitating the FDIC’s and FSLIC’s approach begun four decades earlier. This multi-decade head start was how those funds achieved their 1% required statutory minimum fund balance. This reserve growth occurred during the post-war years of steady economic growth with only modest cycles of recession.
Then the economic disruption with double digit inflation and unemployment of the late 70’s and 80’s led to the complete deregulation of the financial system established during the depression.
Ten years after insuring its first credit unions, the NCUSIF’s financial position at fiscal yearend September 30, 1981, was:
Total Fund Assets: $227 million
Total Fund Equity: $175 million
Insured CU assets: $57 Billion
Total Insured CU’s: 17,000
Fund equity/Insured shares: .30%
CUNA president Jim William told NCUA Chairman Ed Callahan before his GAC speech in 1982, the dominant concern of credit unions was survival.
Because the fund equity ratio was so far short of its 1% legally mandated goal, NCUA implemented the only available option to increase the ratio. Double premiums were assessed in 1983 and 1984 totaling 16 basis points of insured savings for every insured credit union.
However, the ratio continued to decline primarily due to increased losses from the country’s macro-economic challenges. These trends and the prospect of double premiums caused credit unions to ask if there were a better way.
The history of the analysis of the fund’s first dozen years leading up to these changes is in this seven minute video from the NCUA Video Network.
In April 1984, NCUA delivered a congressionally mandated report on the history and current state of the NCUSIF. It included the development of private, cooperative share insurance options and league stabilization funds. It presented four recommendations to restructure the NCUSIF from a premium revenue model, to a cooperative, self-help, self-funding one.
Today’s NCUSIF after 40 Years
The four decades of NCUSIF performance since 1985 have proven the wisdom of the redesign and generated enormous financial savings for credit unions versus annual premiums.
Today the NCUSIF is $21.2 billion in total equity giving a fund insured share ratio of approximately 1.29%. This size represents a 12.7% CAGR since 1981 when the fund’s equity was just $175 million.
The critical success factor of the 1% cooperative funding model is that it tracks the growth of total risk with earning assets, whatever the external economic environment.
This was and is not the fate of the premium based funds. The FSLIC failed and was merged into the FDIC in 1994. The FDIC has assessed an annual premium(s) on total assets every year since the 1980’s.
The FDIC’s ratio of fund equity to insured shares at March 31, 2022 was 1.23%, down from its peak of 1.41% in December 2019. On a number of occasions, the FDIC fund has reported negative equity during financial crisis.
NCUSIF Twice the Coverage Size of FDIC
It should also be noted that FDIC insured savings are only $10 trillion (41%) of the $24.1 trillion total assets in FDIC insured institutions at the end of the March 2022. The FDIC is only .51% of all banking assets.
For credit unions insured shares are 78% of total assets. Today, the NCUSIF’s total assets are 1% of all credit union assets, a ratio two times the size of the FDIC’s.
Five Decades of Reliable, Sound Coverage
Throughout the redesigned NCUSIF’s history, a premium has been assessed to augment the fund four times: 1991 and 1992; and 2009 and 2010. In both situations the premiums were levied based on reserve losses expensed but then subsequently reversed in later years.
In 1985, the fund’s first full year of the redesign, NCUA reported “for the first time ever, the NCUSIF paid a dividend.” The NCUSIF Annual Report further stated that “credit unions were returned $275 million in tangible benefits.” (page 5). This from a fund that just four years earlier reported $175 million in total equity.
The fund continued to pay dividends including six consecutive years from 1995 through 2000, and again in 2008 when the equity ratio was above 1.3%.
These results were achieved because of a collaborative partnership between NCUA and credit unions. The changes were based on an analysis of prior events. Options were evaluated and based on open dialogue at every stage. Ultimately this consensus for change was critical in obtaining congressional support for this unique cooperative solution.
The redesign included commitments by credit unions to guarantee the fund’s solvency no matter the circumstances. But it also mandated guardrails on agency options and required transparency in reporting and managing the fund’s assets.
The NCUSIF four decades of performance has also provided a valuable record for reviewing credit union loss experience in multiple economic circumstances and events. It provides an audited account of actual losses during the many years when there are none and credit unions received a dividend.
But it also documents the actual cash losses in the four or five short recessions or economic upheavals such as the aftermath from the 9/11 attacks, the Great Recession and the most recent COVID economic shutdown.
The NCUSIF’s record is sound. It is proven. The facts are known. So what could possibly go wrong?
Tomorrow I will review the temptations awakened by the NCUSIF’s successful track record.