Wednesday, December 15, 2010

NCUSIF Assessments Will Be More Pro-Cyclical Than FDIC Assessments

During yesterday's Federal Deposit Insurance Corporation (FDIC) Board meeting, the FDIC stated that assessments for banks will be less pro-cyclical under its new system than assessments under the National Credit Union Share Insurance Fund (NCUSIF) system.

FDIC was responding to issues raised by two bank trade associations about competitive imbalances regarding the change in the minimum DIF reserve ratio which would exceed the top statutory reserve ratio of 1.50 percent for the NCUSIF.

Below is FDIC's discussion.

"Two trade groups also noted that the National Credit Union Share Insurance Fund (NCUSIF) reserve ratio is limited by statute to 1.5 percent and argued that a higher DIF reserve ratio could exacerbate competitive imbalances. The presence or absence of a cap on fund size is but one of several statutory differences between FDIC-insured institutions and federally insured credit unions. The FDIC has proposed lower assessment rates that would go into effect when the reserve ratio reaches 1.15 percent. The FDIC believes that these assessment rates are sufficiently moderate that any competitive effect is likely to be small. Moreover, this difference is likely to be more than offset by the lower assessment rates that the FDIC should be able to maintain during a downturn. 2010, for example, credit unions paid on average slightly less than 26 basis points of insured shares. Since almost all credit union deposits are insured, insured shares are analogous to domestic deposits as an assessment base. In comparison, the FDIC estimates that, in 2010, banks and thrifts will have paid an average assessment rate of slightly less than 18 basis points on a domestic-deposit-related assessment base. (Emphasis added) Under the assessment rates that the FDIC proposed in the October NPR, banks and thrifts would pay much lower average assessment rates during a future crisis similar in magnitude to the current one. The proposed system is less pro-cyclical than both the existing system and the NCUSIF system, which is a positive feature when considered across a complete business cycle.

The new system with a higher designated reserve ratio will result in less pro-cyclical assessments compared to the NCUSIF system. That means that FDIC-insured banks will pay slightly more in premium assessments than NCUSIF-insured credit unions during good times; however, banks will pay lower assessment rates during economic downturns than credit unions, when insured institutions can least afford to pay high deposit (share) insurance assessment rates.

In fact, even under FDIC's existing system, federally-insured credit unions in 2010 paid a higher average assessment rate than FDIC-insured banks -- slightly less than 26 basis points versus slightly less than 18 basis points.

1 comment:

  1. Don't forget the opportunity cost on 1% of all CU insured deposits.



The content is provided for educational purposes only, with the understanding that neither the authors, contributors, nor the publishers of this site are engaged in rendering legal, accounting or other expert or professional services. If legal or other expert assistance is required, the services of a competent professional should be sought.

Comments appearing in response to articles appearing on this site do not necessarily reflect the views of the ABA. ABA makes no representations regarding the truth or accuracy of commentary or opinions that may be posted in response to the articles that appear on this website.

The inclusion herein of any link to a website, either in the text of an article or in a comment, does not denote any approval, sponsorship, or endorsement by the ABA, and ABA is not responsible for the content or opinions expressed on those linked websites or related commentary. This content is not licensed to third parties sites and is not affiliated with any third party site. Any reference to the author or this content on any third party site on the Internet is not authorized by the ABA.

It is the policy of the American Bankers Association to comply fully with all antitrust laws. Certain discussions should be considered off-limits, including those that contain competitively sensitive data such as price and cost information, or statements that could be construed as reflecting an attempt or desire to control or influence a particular market or markets. Future pricing or other prospective competitive information should never be shared.