NCUSIF Funding Mechanism Is Broken

The desperation of the credit union trade associations and its regulator, the National Credit Union Association, to shift the cost of the corporate credit union bailout to an entity other than their insurance fund shows that the funding mechanism for the National Credit Union Share Insurance Fund is fundamentally flawed.

The NCUA and credit union trade associations devised the current system for capitalizing the NCUSIF, and Congress enacted that system into law in 1984. Unlike banks, each insured credit union must maintain on deposit in the NCUSIF an amount equal to 1 percent of the credit union’s insured deposits which is held as an asset on their books. If the reserve ratio ever falls below 1 percent, credit unions must write off a proportionate amount of their 1 percent deposit and treat that amount as an expense on their income statements.

FDIC officials told the Treasury Department in 1997 that the difference between the funding structure of the NCUSIF and the FDIC’s funding structure is the timing of losses. FDIC-insured banks pre-pay for losses through premiums that they expense, while credit unions recognize the impairment at the time of the loss.

However, the bailout of the corporate credit union system – credit unions that serve credit unions –will cause credit unions to pay this year 99 basis points on their insured shares or $5.9 billion to restore the NCUSIF to its normal operating level. This would require credit unions to recognize an impairment charge of 69 percent to credit unions’ one percent NCUSIF deposit and pay a premium assessment of 30 basis points or $1.77 billion.

Now, credit union industry does not want to recognize the losses associated with their insurance fund that they designed. The industry and its regulator sought legislation to create a new Stabilization Fund that is separate from the NCUSIF as a way to avoid recognizing these losses in their insurance fund.

This newly created Stabilization Fund would mean that credit unions would not have to write-down their deposit in the NCUSIF; rather, the cost would be spread out over a number of years as credit unions repay the Stabilization Fund’s borrowings.

When it came time for the credit union industry to bite the NCUSIF bullet, they chickened out.

Since the credit union industry does not want to incur the cost of the deposit insurance system they designed, policymakers should change how their deposit insurance fund is funded and require credit unions to pay premiums going forward, just like banks.