NCUA chief warns of new deposit insurance premiums | Credit Union Journal

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Credit unions should brace for new bounties this year to shore up the National Credit Union Equity Insurance Fund.

That was the message Thursday from NCUA President Todd Harper during his first meeting of the agency’s board of directors.

“It’s increasingly clear that the question is no longer whether we should assess a sharing insurance premium, but when and how much,” Harper said.

His comments follow a briefing from CFO Eugene Schied, who said the equity insurance fund’s capital ratio stood at 1.26% at the end of 2020, well below the target level of 1.38. %.

The equity ratio measures equity insurance fund assets — which totaled $19.1 billion as of Dec. 31 — relative to insured equity held by credit unions. If the equity ratio dips below 1.20%, the agency is required by law to assess a premium or develop a fund restoration plan.

The capital adequacy ratio has been on a downward trend in recent years after peaking at 1.46% in 2017 following the closure of the Temporary Business Credit Union Stabilization Fund and its merger with the Equity Fund. equity insurance.

The NCUA last assessed a bounty in November 2009, partly in response to a wave of credit union bankruptcies triggered by the financial crisis. Twenty-eight credit unions failed in 2009 and another 28 in 2010. In 2020, by contrast, only one credit union failed, costing the fund about $1.6 million, Schied said.

The current equity insurance fund woes are the product of an influx of deposits coupled with plummeting investment returns. Thanks to cash from government stimulus programs, consumers and businesses are seeing record levels of deposits in credit unions.

At the same time, persistently low interest rates mean that NCUA’s investment income cannot keep pace. Insurance fund investments in equities had a weighted average return of 1.88% in December 2019. A year later, the return had fallen to 1.30%, according to Schied.

By law, treasury bills are the only investment vehicle open to the NCUA. “There’s a pretty narrow range of what our options are,” Schied said.

One bright spot in what Harper called a “sobering” update: The capital adequacy ratio is set to receive a roughly five basis point boost in April after credit unions made a steady adjustment to the 1% capital deposit they are required to maintain with NCUA. This payment is expected to increase the equity insurance fund by approximately $866 million.

While capital deposit payments provide some breathing room, they’ll likely be offset by a continued decline in investment returns, as well as stimulus-driven deposit increases, Schied said.

“The driver has been the increase in insured stocks,” Schied said.

The NCUA is not expected to recalculate the capital ratio until June 30. Kyle Hauptman, vice chairman of the board, said he wanted to wait until then before considering a bonus.

“We don’t have enough information,” Hauptman said, noting that credit unions are already grappling with the effects of the coronavirus pandemic.

“When someone is having financial difficulty, I’d rather not respond by saying, ‘OK, write us a big check,'” Hauptman said.

Unsurprisingly, many industry players have pushed back against the possibility of new bounties.

In a letter to the board sent ahead of Thursday’s meeting, Curt Long, vice president of research and chief economist for the National Association of Federally-Insured Credit Unions, predicted that capital deposit payments would bring the equity ratio above 1.33% target, or normal operating level, making a premium unnecessary.

“NAFCU opposes any premium that results directly from excess equity growth rather than material market weakness. [share insurance fund]“Wrote Long. « The 2020 [share insurance fund] the audited financial statements show that the fund remains in a solid position and that no premium is needed at this time.

For her part, Harper called a bounty a short-term fix, suggesting that Congress should consider expanding the agency’s investment authority, a theme that struck a chord with Lucy Ito, president and chief executive. of the management of the National Association of State Credit Union Supervisors.

“NASCUS is intrigued by the suggestion of possible congressional action to expand the insurance fund’s investment authority that would maximize return while providing fund protection,” Ito said in a press release Thursday. She added that the state credit union system will study investment options for the Federal Deposit Insurance Corp. to inform possible legislation.

Overall, the equity insurance fund reported $272 million in investment income in 2020, up from $304 million a year earlier. This trend is expected to continue as long as the agency is required to reinvest proceeds from expiring tickets into new tickets paying lower rates, Schied said.

In other actions, the board unanimously approved a rule streamlining insurance requirements for jointly held accounts. It changes the requirement that each account holder must maintain a personally signed account signature card allowing a credit union to provide alternative proof from its account records to satisfy the signature card requirement.

The rule is intended to ensure prompt payment of equity insurance in the event of default.

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