NCUA White Paper on Reforming the NCUSIF

A September 2013 NCUA White Paper sets forth the agency's recommendations for improving the National Credit Union Share Insurance Fund.

According to the White Paper, which was obtained through a Freedom of Information Act request, the National Credit Union Administration (NCUA) made the case for reform by stating that under current law it "does not have the appropriate flexibility necessary to manage the National Credit Union Share Insurance Fund (NCUSIF) in a manner consistent with the growing size and complexity of the credit union industry."

The 2013 White Paper made the following legislative recommendations to Congress.

Congress should approve legislation to remove the statutory cap from the NCUSIF equity ratio. Under current law, the normal operating level is set between 1.2 percent and 1.5 percent of insured shares (deposits) with the NCUA Board traditionally setting the normal operating level at 1.3 percent of insured shares. However, the agency has concluded that going forward a 1.3 percent equity ratio for the NCUSIF cannot be viewed as normal. The NCUA believes 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. In fact, I stated that this would be one possible NCUSIF reform in a January 8, 2014 blog post.

Congress should also amend the Federal Credit Union Act to enable NCUA to calculate premiums paid by insured credit unions based on assets minus net worth, rather than insured shares. NCUA wrote that basing premiums on total assets minus net worth would better account for the risks posed by highly leveraged institutions. The implication of shifting premiums to an asset minus net worth assessment base is that the share of premiums paid by larger credit unions and corporate credit unions would increase, while the premium burden for credit unions with less than $1 billion in assets would fall.

Furthermore, Congress should change the Federal Credit Union Act to enable the NCUA Board to develop a risk-based premium system for credit unions. Under current law, NCUA is required to assess NCUSIF premiums using a uniform percentage applied to the amount of insured deposits held by a credit union. NCUA wrote that by moving from a proportional to a risk-based premium system, this would increase both fairness and incentives for operating safely. In addition, the proposed legislative language submitted by NCUA would allow the Board to establish a different risk-based premium system for credit unions defined as small. However, the White Paper does not specify how the risk-based premiums will be calculated.