NCUA Board Takes 'Wait-and-See' Approach to SIF Premiums
Board agrees to expand derivative investment authority for credit unions; asks CUs for Normal Operating Level comments.
On Thursday, NCUA board members received their quarterly status update of the Share Insurance Fund from agency officials, who reported the projected equity ratio to sit six basis points below Normal Operating Level at 1.22% by June 30, 2021. As of the end of the first quarter, the SIF had a net income of $67 million.
The board meeting, held for the first time as a video conference, was also the first time the members had seen each other in more than a year. While virtually face-to-face, in reality board members face some potentially tough decisions in the near future when it comes to charging credit unions a premium to help increase reserves.
Share Insurance Fund Update
According to NCUA CFO Eugene Schied, the SIF total assets climbed to $19.7 billion at the end of the first quarter of 2021, despite two credit union failures that incurred a loss to the SIF of $200 million.
“Overall, total assets increased $643.6 million during the quarter largely due to capitalization deposits that were invoiced to credit unions,” he said.
This elevated growth was expected mainly due to the massive coronavirus economic stimulus bill passed by Congress. NCUA Board Chairman Todd Harper said, “This growth in share deposits continues to stress the Share Insurance Fund’s equity ratio, just as it does the net worth ratios of federally-insured credit unions.”
Board Vice Chairman Kyle Hauptman observed that in the past few months it has been difficult to predict anything, much less the future of the Share Insurance Fund. “As the equity ratio is a bit higher than we may have expected a few months ago. There are also some reasons to believe the equity ratio may increase by this time next year, if our economy normalizes the way some expect,” he said. “But had today’s projection been three basis points lower, we’d be required to put together a restoration plan.”
That requirement kicks in if the equity ratio hits 1.2%. “However, I think we all agree that at 1.22% we’re still playing a little too close to the highway,” Hauptman said.
Board Member Rodney Hood, along with the other board members, would like to exhaust all options before any kind of premium plan could be imposed on credit unions. Harper said, “That plan may include premiums at some point, but it does not require us to charge credit unions immediately. We could take a wait-and-see approach. We could take the approach of small and steady premiums over several years. Or, we could charge a large premium up front.”
Harper concluded, “I am committed to maintaining a steady course for the Fund as we navigate these unchartered waters.”
Normal Operating Levels
The board agreed, in a 3-0 vote, to publish a request for comments in the Federal Registry concerning the Share Insurance Fund’s normal operating level policy. The Federal Credit Union Act requires the normal operating level to be set between 1.2% and 1.5%. The current operating level was set at 1.38% in December of 2019 and again in 2020.
The current normal operating level policy was set by the board in 2017 and includes three objectives:
- Retain public confidence in Federal Share Insurance;
- Prevent impairment of the 1% capital deposit credit unions contribute to the SIF; and
- Insure the SIF withstand a moderate recession without declining the equity ratio below 1.2%.
Harper said the current normal operating level policy was approved in September 2017. Since then, a lot has changed, especially with the negative economic impact caused by the pandemic. “Credit unions also face a prolonged period of very low-interest rates for the foreseeable future, creating another drag on the equity ratio. In addition, the Federal Reserve Board has decided to discontinue publishing its adverse forecasts, which [the] NCUA’s economists and analysts had previously used to determine the normal operating level.”
Hauptman said, “Today’s request for comment is all about what [the] NCUA should do anywhere between 1.2% and 1.5%. We want to hear what folks think should occur at the various points in between those two goal posts.”
Hood added, “I think we should certainly be very careful in changing the structure of the net operating level – that’s not to say that no changes are warranted.”
Harper, Hauptman and Hood all encouraged credit union leaders to send in their comments as soon as the request is published – which is expected to be by Friday and will be open for comments for 60 days.
Expanding Derivatives
In a 3-0 vote, the board approved an update to the agency’s derivatives rule, which gives credit unions more investment authority.
The rule ensures credit unions using derivatives must maintain strong internal controls, including separation of duties to ensure effective governance.
”For example, under the final rule, duties for asset-liability management, financial reporting, derivatives execution and oversight, and collateral, counterparty and margining management will be handled by different professionals within the credit union. This separation of duties is necessary to ensure the safe and sound operations of a derivatives program and to mitigate potential opportunities for insider fraud and abuse,” Harper said.
All board members agreed in order for this derivatives expansion to be successful, credit unions must put in place essential guardrails such as credit union board members receiving regular training and education on derivatives.
“Credit union board directors are the first line of defense for the Share Insurance Fund. If a credit union chooses to authorize the use of derivative hedges, these stewards need to have a firm understanding of derivatives transactions, reinforced, from time to time, through regular training and briefings in order to conduct effective oversight,” Harper said.