Insurance Premium – Strong CUs Subsidizing Weak CUs

At its September Board meeting, the NCUA Board will be considering whether to assess an insurance premium on all federally-insured credit unions.

By law, if the NCUSIF equity ratio is below 1.2 percent, NCUA must assess all credit unions to restore the share insurance fund to 1.2 percent. All indicators suggest that the NCUSIF will be below the 1.2 percent threshold.

The credit union trade press is estimating that this assessment will be about 15 basis points of insured shares (deposits) to return the fund to its desired level.

The Federal Credit Union Act requires the premium assessment to be the same for all insured credit unions regardless of the risk the credit union poses to the insurance fund.

So, when NCUA mails the invoices to all insured credit unions, the vast majority of sound and well-managed credit unions will be subsidizing the behavior of the riskier, poorly operated credit unions. Because they will all pay the same rate. Moreover, the loss burden from any credit union failures will be disproportionately shared by these stronger performers.

Instead of the current flat rate assessment, the credit union industry and its regulator should advocate for a risk-based premium system. This risk-based system can be designed to work in conjunction with the current NCUSIF capitalization deposit to better align incentives.

This would ensure riskier credit unions are paying their fair share of the cost to the NCUSIF.