NCUA Makes Case for NCUSIF Premium, Says Impact on CUs Will Be Minimal

National Credit Union Administration (NCUA) Chairman Rick Metsger in a January 6, 2017 letter to Rep. Sean Duffy (R -WI) stated "a premium of 3 to 6 basis points would have a minimal impact on credit unions in the aggregate."

Based upon September Call Report data, the impact of a 6 basis point premium assessment would cause:

• the aggregate net worth ratio to fall 4 basis point to 10.81 percent;
• the average return on average assets would fall from 0.78 percent to 0.73 percent;
• the aggregate cash-to-asset ratio to decline from 8.56 percent to 8.52 percent;
• the number of credit unions reporting negative earnings would rise from 1,174 credit unions to 1,388 credit unions;
• eight credit unions to slip from adequately capitalized to undercapitalized and 12 credit unions would drop from well-capitalized to adequately capitalized; and
• credit union lending would be reduced by 0.04 percent.

The letter also makes the case for NCUA assessing credit unions by pointing out that the National Credit Union Share Insurance Fund (NCUSIF) equity ratio was trending downward from 1.27 percent due to strong insured share growth and the low return on the NCUSIF investment portfolio. Under its base case assumption, the NCUSIF equity ratio will fall to 1.25 percent at the end of 2017 and 1.22 percent by the end of 2019. If no premiums are assessed between now and the end of 2019, credit unions would face a premium assessment between 5 and 10 basis points at that time based on current trends.

However, the base case assumption does not assume an economic downturn or the unexpected failure of one or more large credit unions. NCUA's analysis shows that the NCUSIF equity ratio of 1.32 percent would allow the NCUSIF to withstand two consecutive years of stress and still maintain an equity ratio of at least 1.20 percent. Under the Federal Reserve's severe economic stress scenario, the equity ratio would have to be at 1.44 percent to avoid falling below 1.20 percent over a five-year period and an equity ratio of 1.27 percent to keep the NCUSIF equity ratio from falling below 1.00 percent. It should be noted that by statute NCUA must charge a premium if the equity ratio falls below 1.20 percent and if the equity ratio falls below 1 percent, credit unions would be required to expense a portion of its NCUSIF capitalization deposit.

Chairman Metsger further noted that NCUA's operating expenses charged to the NCUSIF would have the smallest impact in altering the trend in the NCUSIF equity ratio. Chairman Metsger wrote that NCUA would have to cut its operating expenses charged to the NCUSIF by 50 percent ($100 million) to increase the NCUSIF equity ratio by 1 basis point. NCUA charges the NCUSIF almost $200 million to fund its current operating budget of $298.2 million.

In addition, the letter stated that credit unions cannot directly receive a rebate from the Temporary Corporate Credit Union Stabilization Fund (TCCUSF). Rather when the TCCUSF is closed, the residual assets will be transferred to the NCUSIF. If the residual assets push the NCUSIF equity ratio above its normal operating level at the end of the calendar year, then insured credit unions could be entitled to a rebate. Based upon information from September 2016, the closure and transfer of the TCCUSF would raise the NCUSIF equity ratio by as much as 15 basis points. However, the agency cautions that closing the TCCUSF early and transferring the corporate system resolution program assets and obligations to the NCUSIF could introduce significant volatility to the NCUSIF equity ratio.

NCUA estimated that the range of a potential TCCUSF assessment rebate would be between $1.9 billion and $2.4 billion. This assessment rebate would be paid out after recoveries are paid to depleted capital holders.