NCUSIF Equity Ratio of 1.30 Percent Is Not Normal

The National Credit Union Administration (NCUA) Board is proposing to increase the normal operating level of the National Credit Union Share Insurance Fund (NCUSIF) to 1.39 percent from its current level of 1.30 percent.

The Board will pay for the increase in the normal operating level to 1.39 percent by closing the Temporary Corporate Credit Union Stabilization Fund (TCCUSF) in 2017, prior to its scheduled closing date in June 2021, and distributing all assets, property, and funds of TCCUSF to the NCUSIF.

By law, the normal operating level must be set by the NCUA Board between 1.20 percent and 1.50 percent of insured shares.

However, this proposal has been greeted by most of the credit union community like a skunk at the church picnic.

The Credit Union National Association (CUNA) believes a normal operating level of 1.39 percent is too high. But CUNA stated it is willing to accept a temporary 4 basis point increase in the equity ratio to insulate the NCUSIF from legacy asset volatility.

Joining the chorus, the National Association of Federally-Insured Credit Unions believes the current normal operating level for the NCUSIF is appropriate and a dramatic increase in the NCUSIF equity ratio to 1.39 percent in unnecessary.

Some credit unions commented that a normal operating level of 1.30 percent was sufficient to weather the recession and financial crisis.

However, this viewpoint that a normal operating level of 1.30 percent was sufficient to weather the financial crisis is not supported by the evidence.

The TCCUSF was created by Congress in 2009, because credit unions were looking at a 91 basis point hit to the NCUSIF in 2009. This means that credit unions would have been required to immediately expense a portion of their one percent NCUSIF capitalization deposit, as well as pay a premium assessment.

According to a September 2013 White Paper on the NCUSIF, the agency staff concluded that going forward a 1.3 percent equity ratio for the NCUSIF cannot be viewed as normal. The White Paper stated that "the NCUSIF needs an equity ratio of at least 2 percent to provide an asset base that would better enable the NCUSIF to withstand the types of pressure that arose during the recent financial crisis and recession." The agency estimated that the NCUSIF equity ratio needed to be at 2.17 percent of insured shares to prevent any depletion of a credit union's one percent NCUSIF capitalization deposit during the recent financial crisis and recession.

Moreover, there will be inevitable comparison between the NCUSIF to the Federal Deposit Insurance Corporation's Deposit Insurance Fund (DIF). The Federal Deposit Insurance Corporation has stated that a designated reserve ratio of at least 2 percent is an integral part of its comprehensive, long-range management plan for the DIF.

While credit unions will oppose any increase in the NCUSIF normal operating level, there will be political pressure on NCUA to increase the normal operating level.

As a first step, the NCUA Board should raise the normal operating level to its maximum level permitted by law of 1.50 percent, instead of the proposed 1.39 percent.

A second step would require legislation removing the statutory cap on the NCUSIF normal operating level.

Removing the statutory cap on the normal operating level would provide the NCUA Board with greater flexibility to manage the NCUSIF normal operating level. An equity ratio of 2 percent for the NCUSIF would provide an asset base, which could withstand losses that arose during the financial crisis and the Great Recession. It would also ensure parity between the NCUSIF and the DIF.