Wednesday, January 8, 2014

Reforming the NCUSIF Is a Legislative Priority for NCUA

In its draft 2014 - 2017 Strategic Plan, the National Credit Union Administration (NCUA) identified one of its legislative priorities as "[i]mproving NCUA’s ability to manage the NCUSIF by providing more flexibility in setting the normal operating level and building retained earnings for the NCUSIF in a manner consistent with the size and complexity of the credit union industry and financial stability goals."

The Federal Credit Union Act defines the normal operating level as an equity ratio specified by the Board, which shall be not less than 1.2 percent and not more than 1.5 percent. The NCUA Board is currently setting the normal operating level at 1.30 percent of insured deposits (shares).

NCUA is also required distribute excess funds from the NCUSIF, if the NCUSIF equity ratio is greater than the normal operating level and the available assets ratio is above 1 percent. This assumes that all borrowings from the Federal government had been repaid with interest.

But what does it mean to provide more flexibility in setting the normal operating level and to build retained earnings for the NCUSIF in a manner consistent with the size and complexity of the credit union industry?

The Strategic Plan unfortunately does not provide any details.

While I don't know what NCUA intends to propose, recent legislative and regulatory developments dealing with the FDIC Deposit Insurance Fund (DIF) may provide some guidance.

The Dodd-Frank Act set a minimum Designated Reserve Ratio for the DIF at 1.35 percent of insured deposits (the former minimum was 1.15 percent). The Dodd-Frank Act also removed the upper limit on the Designated Reserve Ratio, which had been capped at 1.50 percent. This effectively removed any limit on the size of the DIF. In addition, the Dodd-Frank Act eliminated the requirement that FDIC provide dividends from the DIF when the reserve ratio was between 1.35 percent and 1.50 percent and gave the FDIC Board the sole discretion in determining to pay dividends if the DIF reserve ratio was at least 1.50 percent.

With no cap on the DIF Designated Reserve Ratio, the FDIC Board in December 2010 adopted a final rule setting the minimum Designated Reserve Ratio at 2 percent. In addition, the FDIC Board in February 2011 decided to indefinitely suspend the payment of dividends.

While you may not agree with this outcome, I would contend that there are strong incentives for NCUA officials to pursue a similar path. NCUA officials are risk-averse. The last thing NCUA officials want is to go to Congress requesting assistance like they did in 2009 regarding the corporate credit union debacle. By increasing the size of the NCUSIF fund, this would lower the probability of future congressional assistance.

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