Former National Credit Union Administration (NCUA) Chairman Dennis Dollar is quoted in a featured column in CU Today making the case that there is no need for risk-based National Credit Union Share Insurance Fund (NCUSIF) premium.
Dollar argues that "[t]he NCUSIF is already risk based in that the credit unions with the highest level of assets contribute the most to the fund, and those with the least assets contribute the least."
While it is true that larger credit unions hold larger one percent NCUSIF capitalization deposits than smaller credit unions and contribute the most to the NCUSIF, size has nothing to do with risk-based premiums.
Risk-based premiums are based upon the risk profile of the credit union. Credit unions that pose less risk to the NCUSIF will pay a lower premium rate, while riskier credit unions would pay higher premium rates. Unfortunately, former Chairman Dollar's comment misses this point.
For example, assume you have two credit unions with $200 million in insured deposits. One credit union is concentrated in commercial loans and has a high delinquency rates, while the other has a more traditional credit union lending profile of auto and home mortgage loans with few delinquencies. Under the present system, both institutions are contributing the same amount to the NCUSIF.
But does that make sense?
No. The credit union with a greater concentration in business loans and high delinquency rates should contribute more to the NCUSIF than the other credit union with a more conservative risk profile.
Moreover, Dennis Dollar states that "the present system has worked so well for decades and survived the financial crisis in great shape."
I think many observers would disagree with Dollar's assessment that the present system worked well.
The current system for funding the NCUSIF is pro-cyclical. During a severe economic downturn, credit unions face the threat of writing down all or part of their NCUSIF capitalization deposit at the very moment that credit union earnings and capital come under pressure.
In fact as you will recall, NCUA went to Congress seeking a bailout of the NCUSIF. Credit unions were looking at a 91 basis point hit to the NCUSIF in 2009. The legislation shifted the cost of the corporate credit union debacle from the NCUSIF to the Temporary Corporate Credit Union Stabilization Fund, which has borrowed funds from the U.S. Treasury to cover the expenses of resolving five failed corporate credit unions.
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Dollar is much like the other cu talking heads. He's corrupted by the desire to continue to feed at the trough of credit unions but the majority of assets see nothing new and no value.
ReplyDeleteHe's in the same pickle as Cuna, they don't have a solution and the large credit unions have passed them by and tuned them out.
His argument on risk premiums is a good example as you demonstrated.
IF large credit unions even bothered to read dollar's musing, their reaction in part was, "why should my insurance rate be higher just because I'm larger?"
In the distorted world of credit unions, success is frowned upon.
For my credit union, had risk based premiums been in place, it would have saved us at least some money over the last 6 years. But corporate credit unions also need a different premium structure, well beyond just risk based. How does it make sense that they pay based on insured deposits, just like the rest of us when unlike the rest of us, their insured deposits are a very small fraction of their assets. NCUA needs to fix the base the premium is calculated on for corporate credit unions too. For the record, we pulled out of corporate credit unions a long time ago, but that doesn't stop us from being on the hook for their (and our regulator's) failure.
ReplyDeleteAnother empty suit impressing credit unions with a resume chock full of jobs that accomplished nothing for credit unions or constituencies.
ReplyDeleteFor the credit unions they pay for his advisory, they can't tell the difference because they never look past trade associations for "outside advice".