Friday, May 20, 2011

Voluntary Prepayment Program Proposed

NCUA has floated a proposal that would permit credit unions to voluntarily prepay future assessments to the Temporary Corporate Credit Union Stabilization Fund (Fund). While NCUA does not have the legal authority to mandate prepaid assessments, it does have authority to collect assessments in advance on a voluntary basis.

What is motivating NCUA to propose this voluntary program is the large upfront cash outlays associated with corporate credit union resolutions. NCUA is projecting that the Fund's cash outlays will total $8.44 billion through October 2012. NCUA is estimating that $5.5 billion of the cash outlays would be met through borrowings from Treasury. This still leaves a shortfall of $2.94 billion.

Under the terms and conditions of the proposed voluntary program, the minimum prepayment by a credit union would be $10,000 and the maximum voluntary contribution would be 36 basis points of insured deposits as of March 31, 2011. According to NCUA's analysis, roughly 6,023 credit unions would be eligible to participate in the program. Credit unions with less than $2.8 million in assets would not be able to participate because the maximum voluntary prepayment would be below the $10,000 minimum threshold.

This voluntary prepaid assessment would be a non-interest earning asset; but will receive a low-risk weighting for risk-based capital purposes. [Note: FDIC assigned a risk weighting of zero for prepaid assessments by FDIC-insured banks.]

Additionally, NCUA would need at least $300 million in aggregate prepaid assessments before the agency will go forward with the program. If all eligible credit unions participate, NCUA projects that it will raise about $2.8 billion in prepaid assessments.

The voluntary prepaid assessments would apply to assessments beginning in 2013, not to assessments in 2011 and 2012. NCUA would deduct the excess amount from Stabilization Fund assessments in subsequent years until the balance of the credit union‘s advance account is reduced to zero. If a credit union has any leftover prepaid assessments when the life of the Fund ends in June 2021, the balance will be returned to the credit union at that time.

Credit unions that participate in the program will record assessment expenses annually as they are made by the NCUA Board.

Read the proposal.

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