The Temporary Corporate Credit Union Stabilization Fund is currently scheduled to close in 20211. However, the Federal Credit Union Act gives the NCUA Board the authority to close the Stabilization Fund before then if certain conditions are met2. At its July 2017 open meeting, the NCUA Board approved publishing a request for comment in the Federal Register to obtain public input on whether to close the Stabilization Fund in 20173. Having obtained this input, today the NCUA Board is faced with the important choice of whether to close the Stabilization Fund in 2017, or wait until some date in the future—that is anywhere from next year to the currently scheduled closure in 2021.
For over a year, the agency has been thoroughly researching and analyzing this issue. The NCUA’s legal analysis concludes that the statutory criteria have been met to close the Stabilization Fund. In particular, all borrowings from the U.S. Treasury were fully repaid as of October 2016. The Stabilization Fund has a positive net position of approximately $2 billion as of June 30, 2017, due primarily to nearly $4 billion in net legal recoveries. The NCUA has also fully investigated the corresponding accounting and operational implications of closing the Stabilization Fund, as detailed in the July 2017 request for comment published in the Federal Register.
The financial considerations also now support closure of the Stabilization Fund. As detailed in the July 2017 request for comment, the agency’s internal and external experts modeled the remaining exposure to Corporate System Resolution Program obligations under various economic scenarios4. These obligations are well within the National Credit Union Share Insurance Fund’s capacity to manage without inordinate risk, provided additional equity is maintained in the Share Insurance Fund.
The NCUA Board’s choice really boils down to two options. The first option is to continue to rely on the emergency and temporary mechanism put in place to absorb the costs of the economic crisis and the Stabilization Fund, even though almost a decade has gone by since the crisis began. The second option is to end this temporary and emergency measure and return to normal operations where the Share Insurance Fund resumes fully its customary role in managing resolution costs.
The Stabilization Fund was vital to the success of the Corporate System Resolution Program. The Stabilization Fund was created in May 2009 to accrue the losses from five failed corporate credit unions insured by the NCUA and assess all insured credit unions for these losses over time. If the Stabilization Fund had not been created, these losses would have been borne by the Insurance Fund. By the end of 2010, this would have caused the Insurance Fund’s equity ratio to go as low as negative 0.09 percent5 and fully impaired credit unions’ one-percent contributed capital deposit6.
The Stabilization Fund provided short-term and long-term funding to resolve a portfolio of residential mortgage-backed securities, commercial mortgage-backed securities, other asset-backed securities, and corporate bonds (collectively, legacy assets). Under the Corporate System Resolution Program, the NCUA created a re-securitization program where the agency issued a series of NCUA Guaranteed Notes (NGNs) that were sold to investors to provide long-term funding for the legacy assets.
It is important to note, the Corporate System Resolution Program did not bail out corporate credit unions. Resolution costs of the failed corporate credit unions were funded through the Stabilization Fund from two primary sources: $4.8 billion in Stabilization Fund assessments paid by insured credit unions and borrowings on the NCUA’s $6 billion line of credit with the U.S. Treasury7. The U.S. Treasury borrowings were fully repaid in October 2016 primarily through legal recoveries, credit union assessments, NGN guarantee fees, and distributions from the Share Insurance Fund. In short, the Stabilization Fund contained the costs of the failed corporates within the credit union system, at no loss to taxpayers.
The NCUA’s projections indicate no additional Stabilization Fund assessments are now necessary. In fact, the Stabilization Fund has accumulated a surplus, predominantly due to success with legal recoveries. The Stabilization Fund has served its purpose. The resolution costs of the five failed corporate credit unions have been successfully spread out so they could be contained within the credit union system. Therefore, it is time to close the Stabilization Fund in a fully transparent, objective, and accountable manner. Closing the Stabilization Fund in 2017 will allow the NCUA to begin distributing surplus funds to credit unions. These funds can then be put to work in the credit union community.
Upon closure, the Stabilization Fund’s remaining assets and liabilities are distributed to the Insurance Fund as prescribed by the Federal Credit Union Act8. This statutory provision is clear and unambiguous. Congress provided no authority for the NCUA to make a distribution to credit unions directly from the Stabilization Fund. This is consistent with the fact the Stabilization Fund is a temporary, emergency supplement to the Share Insurance Fund and that it would rely heavily on taxpayer-funded borrowings from the U.S. Treasury. Any distributions from the Stabilization Fund prior to its closure that are not necessary to pay for costs in resolving the failed corporate credit unions would inappropriately increase reliance on taxpayer-funded borrowings.
Rather, once the Stabilization Fund had served its purpose to absorb the costs of the failed corporate credit unions, the act directs that the remaining assets and liabilities be distributed to the Insurance Fund9. This reflects a return to normal operations for the Insurance Fund, which contains the financial resources contributed by credit unions to fund federal share insurance costs. The traditional statutory provisions for the Share Insurance Fund then govern any distribution of surplus equity to credit unions10. The Insurance Fund’s statutory provisions provide detailed instructions about when distributions occur. Such instructions are noticeably absent from the Stabilization Fund’s statutory provisions11.
Closing the Stabilization Fund at this time will increase the equity ratio of the Share Insurance Fund. As required by the Federal Credit Union Act, the NCUA must distribute any resulting equity12 above the normal operating level to insured credit unions13. While we currently project surplus equity, I want to be clear that the equity ratio could decline between now and the end of the calendar year if additional reserves for credit union failures are needed or if other unexpected developments occur that would significantly affect the equity ratio. This could reduce or eliminate the actual distributions that would be paid. However, to the extent actual performance of the Share Insurance Fund permits, the multi-year process of distributing surplus funds to insured credit unions would therefore begin in 2018.
Thus, I support closing the Stabilization Fund in 2017. This ends a crisis-era mechanism that is no longer needed. It also starts putting surplus money to work in credit unions as soon as possible instead of waiting until 2021 or later.
While I recognize the importance of distributing surplus funds to insured credit unions, at the same time the NCUA must ensure the Share Insurance Fund has the resources to guard against reasonably foreseeable future adverse economic conditions. That is why a necessary component of the decision to close the Stabilization Fund calls for raising the normal operating level of the Insurance Fund.
As noted previously, the Federal Credit Union Act designates the normal operating level as the point at which a distribution of surplus equity in the Share Insurance Fund is returned to federally insured credit unions. It is incumbent on the NCUA Board, to the extent possible and within the statutory limitations, to set the normal operating level so the Insurance Fund has sufficient resources to handle reasonably foreseeable risks. To do otherwise would be irresponsible and represent undue risk to the credit union community. The NCUA Board would be negligent in its duty if it returns amounts over what is needed to maintain the current operating level of 1.30 percent without also considering the broader and long-term impact on credit unions and the Insurance Fund.
The 1.30 percent normal operating level, last set in 2007, may have been what the NCUA customarily managed to. However, the methodology used pre-dates the 2007–2009 economic crisis. Much has transpired since then, including that the risks to the Share Insurance Fund have evolved and these risks will increase, at least temporarily, with the closure of the Stabilization Fund. In our effort to close the Stabilization Fund, we must not and cannot endanger the Share Insurance Fund.
So, if the NCUA Board decides to close the Stabilization Fund in 2017, it is also faced with another vital choice—that is, what the normal operating level of the Insurance Fund needs to be to handle its customary exposures and the remaining Corporate System Resolution Program obligations.
There are real-world implications of this choice. This choice can result in the need for a premium assessment triggered by a declining Insurance Fund equity ratio and impending potential increases in losses associated with credit union failures. Or, it can mean applying Stabilization Fund resources to address the Insurance Fund’s shortfall, underwrite an objective and transparent normal operating level, and—hopefully—remit a distribution in early 2018.
Accordingly, after careful analysis based on the current facts, I support raising, for the time being, the Share Insurance Fund’s normal operating level to 1.39 percent for the reasons I will articulate momentarily. I want to emphasize that the agency will continue to analyze the Insurance Fund’s risk exposure, and each subsequent year the NCUA Board will evaluate what the normal operating level needs to be based on the relevant data and trends as they evolve over time14.
First and foremost, I support increasing the Share Insurance Fund’s normal operating level at this time because it is consistent with the responsibilities the NCUA Board has under the Federal Credit Union Act15. In the act, Congress set a statutory trigger for the NCUA Board to take prompt action if the equity ratio falls below 1.20 percent of total insured shares or is projected to fall below 1.20 percent within six months16. In this event, the NCUA Board is required to assess a premium to restore the fund’s equity ratio to at least 1.20 percent or establish and implement a fund restoration plan within 90 days17. Therefore, maintaining sufficient equity to avoid the Share Insurance Fund falling into this condition for foreseeable risks is fully consistent with this mandate.
I know credit unions advise their members to save during good times for the inevitable rainy day. They never advise their members to rely solely on their credit card line to meet rainy day expenses and hope the next rainy day doesn’t come before they have finished paying for the first one. Credit unions do not manage their level of capital and liquidity so close to the bare minimum that even a relatively small, unexpected loss means the difference between being safe and sound and being a troubled institution. Rather, credit unions retain earnings during good times to build up a cushion against reasonably foreseeable future economic challenges. This is simply prudent financial management. Just like credit unions, the NCUA must operate prudently by building sufficient capacity in the Insurance Fund to account for the various uncertainties facing it and the credit union community.
The NCUA must be mindful not to hold too little equity in the Share Insurance Fund, with the corresponding risk that premiums will be necessary when credit unions can least afford them. Nor should the NCUA hold too much equity, which could lead to underutilization of resources within the credit union community. Instead, the goal should be to have a reasonably prudent level of equity consistent with contemporary risk exposures to fulfill our duty in managing the Insurance Fund.
A thorough analysis was conducted by internal and external experts based on independent and objective criteria. The NCUA used an independent source, the Federal Reserve Board’s economic scenarios for its 2017 annual stress test supervisory protocol, for the macroeconomic assumptions used in modeling the Share Insurance Fund’s exposure to economic stresses18. This analysis indicates the equity ratio of the Insurance Fund needs to be at least 1.39 percent with the closure of the Stabilization Fund to withstand the impact of a moderate recession and remain above the statutory trigger for remedial action of 1.20 percent19.
This is not an unduly or overly conservative posture. It isn’t assuming a worst case scenario, or even a relatively rare severe recession. This approach simply seeks to provide reasonable protection from a moderate economic recession. These recessions occur with enough frequency that the risk they pose to the Share Insurance Fund cannot be trivialized20.
There are three key risks to the equity ratio for which the 1.39 percent normal operating level accounts. Specifically, the 1.39 percent level accounts for the following:
- Four basis points to reflect the risk posed by the remaining obligations of the Corporate System Resolution Program;
- Two basis points to reflect the projected decline in the equity ratio through 2018 that will occur even without a recession; and
- 13 basis points of protection for risks to the equity ratio posed by insured credit unions.
When combined, this means that 19 basis points above the 1.20 percent statutory minimum—an equity ratio of 1.39 percent—is currently needed to protect against a moderate recession.
There is an objective, transparent basis underlying each of these three numbers. The calculations and methodology were thoroughly and transparently described in staff’s presentation to the NCUA Board at its July 2017 open meeting, in the request for comment published in the Federal Register, during a webinar the NCUA hosted on this subject in August 2017, and in all the related materials that are posted on the NCUA’s website21. I will reiterate them again here.
First, closing the Stabilization Fund in 2017 will expose the Share Insurance Fund’s equity ratio to any change in the remaining obligations of the Corporate System Resolution Program. This risk to the equity ratio derives from the remaining legacy assets that cannot be sold until the corresponding NGNs they collateralize mature, for the most part not until 2020 and 2021. The NCUA engaged BlackRock to model the impact on the projected cash flows of the legacy assets based on the Federal Reserve Board’s economic stress scenarios. This analysis concluded that a moderate recession would reduce the value of the Insurance Fund’s claim on the corporate credit union asset management estates by roughly $400 million, which would equate to a reduction in the equity ratio of four basis points22. It is critical that the Insurance Fund maintain a sufficient amount of equity to cover potential changes in the value of the claims on the asset management estates of the failed corporate credit unions.
Second, current trends and factors separate from the management of the Stabilization Fund’s assets and liabilities are straining the equity ratio of the Share Insurance Fund. The equity ratio has been declining over the last several years. We anticipate it will continue to do so, even without an economic downturn. This decline is due to continued strong growth in insured credit unions’ shares and low yields on the Insurance Fund’s investments, which are limited by law. Even somewhat optimistic projections indicate a decline of two basis points in the equity ratio is expected to occur before the remaining NGNs begin to mature in 2020 and the exposure to the legacy assets can be reduced. Holding the additional two basis points in the Insurance Fund now will help ensure there is sufficient equity to account for the potential decline in value of the claims on the asset management estates and avoid future premiums.
Third, a moderate recession is projected to produce a decline of 13 basis points in the equity ratio due to the effects on the three primary and customary drivers of the Share Insurance Fund’s performance: insured share growth, interest income on the fund’s investment portfolio, and insurance losses. The decline of 13 basis points is derived through an analysis that looks at historical relationships to link the three main customary drivers of the Insurance Fund’s equity ratio to the economic variables contained in the Federal Reserve scenarios. The projections for the drivers are then used to simulate how the fund would perform under an economic stress23.
The agency modeled both the Insurance Fund’s equity needs so as not to fall below 1.20 percent under the stress of both a moderate recession and a severe recession. While the severe recession scenario is more conservative, managing to a moderate recession provides a good balance between maintaining sufficient equity in the Insurance Fund and keeping money at work in the credit union community.
|Moderate Recession||Severe Recession|
|Equity for Insurance Fund Stress||1.33%||1.41%|
|Equity for Claims on AMEs||0.04%||0.11%|
|Projected Equity Ratio Decline in 2018 and 2019 (based on current performance trends)||0.02%||0.02%|
Increasing the normal operating level to 1.39 percent is squarely within the NCUA Board’s discretion under the Federal Credit Union Act. It does not constitute a premium. Premiums and assessments previously paid by credit unions were necessary and within the agency’s authority when they were declared based on the condition of the respective funds at the time.
The conditions of the funds were properly reflected on financial reports based on applicable accounting and other statutory standards. Subsequent events, predominantly legal recoveries, have allowed the Stabilization Fund to accrue a positive net position25. While closing the Stabilization Fund will increase the equity ratio of the Insurance Fund, the agency is under no legal obligation to distribute any funds to insured credit unions other than amounts above where the NCUA Board sets the normal operating level.
Some in the credit union community contend a 1.30 percent normal operating level has historically been sufficient to address risks to the Share Insurance Fund, including during the 2007–2009 financial crisis. This is simply not true. The very existence of the Stabilization Fund and the fact the NCUA borrowed $5.1 billion from the U.S. Treasury to fund resolution obligations, demonstrates that the credit union community was not prepared to handle the impact of the large losses that resulted from the failure of five federally insured corporate credit unions as a result of the 2007–2009 recession.
These corporate credit unions were not some wholly separate and anomalous externality. They were insured credit unions created, funded26, and governed by natural-person credit unions. As noted previously, without the Stabilization Fund, all of the equity in the Insurance Fund would have been consumed by these losses.
The corporate system is better regulated now, and much smaller than it used to be. Therefore, the exposure to future losses from corporate credit unions should be significantly reduced. However, one cannot ignore the fact that the Insurance Fund was imperiled by the risk exposure of this portion of the credit union community.
Others contend that the credit union community weathered the financial crisis just fine with the caveat “if you don’t include the corporate credit union losses.” This contention also is not consistent with established historical fact. The number of troubled credit unions, including large institutions, increased materially during the Great Recession27. The Share Insurance Fund’s equity ratio fell below 1.20 percent even without the corporate credit union losses. Meaning, the equity ratio fell below 1.20 percent only because of natural-person credit union losses and insured share growth.
The result was two Share Insurance Fund premiums totaling 22.7 basis points or $1.66 billion28. The actual decline in the equity ratio from the 2007–2009 severe recession was predominantly the result of the increase in loss reserves for natural-person credit unions, as required under accounting standards applicable to the Insurance Fund and, to a lesser extent, elevated insured share growth29. Realized Share Insurance Fund losses were significantly elevated as well. From 2008–2012, 112 natural-person credit unions failed at a cost of $807 million to the Insurance Fund30.
Clearly, a 1.30 percent normal operating level for the Share Insurance Fund was not adequate to handle the 2007–2009 severe recession. The agency’s current analysis indicates that a normal operating level of 1.33 percent would be sufficient to handle a moderate recession without the Share Insurance Fund falling below 1.20 percent once there is no longer any exposure to the legacy assets.
The credit union community is growing larger and more complex, in large part due to its outstanding member service. Natural-person credit unions are increasingly being provided more authority and discretion to take risk to serve their members. Most will use this discretion prudently and manage their risks well. However, invariably some will not. New economic, financial, and operational challenges driven by ongoing changes in technology and the marketplace will also continue to create new risk exposures. Therefore, in managing the Share Insurance Fund, the NCUA must consider not only past performance, but also emerging trends and the cumulative effects of changes in the contours of the credit union community.
I respect that reasonable minds can disagree on what level of equity the Insurance Fund needs to avoid falling below the statutory minimum of 1.20 percent. However, it is essential that we all have an accurate understanding of well-established and indisputable historical facts. Anything else is a disservice to the credit union community and the members it serves.
If the Stabilization Fund were to remain open, the year-end equity ratio of the Share Insurance Fund is projected to be 1.25 percent at best, well below the current 1.30 percent normal operating level. It will continue to trend down toward the minimum statutory level of 1.20 percent. In this scenario, the NCUA Board would be compelled to charge a premium in the near future to maintain the Insurance Fund’s equity ratio at a prudent level. In its current condition, the Insurance Fund’s equity ratio is ill equipped to withstand even a relatively minor downturn in the economy. We simply cannot ignore a weakening Share Insurance Fund and the possibility of a recession in the foreseeable future.
In contrast, with the closing of the Stabilization Fund, the year-end equity ratio of the Insurance Fund is projected to be 1.45 percent to 1.47 percent, absent any material developments that affect the equity ratio between now and year-end. This would solidify the health of the Insurance Fund. Retaining some of the positive net position currently in the Stabilization Fund will provide for the remaining obligations of the Stabilization Fund and allow the agency to mitigate the stresses at work on the Insurance Fund. It will allow the agency to maintain an equity ratio well above 1.20 percent, barring an unforeseen dramatic downturn in the economy, of course.
This is fully consistent with the discretion the Federal Credit Union Act provides the NCUA Board in setting the normal operating level. Moreover, raising the normal operating level will allow the agency to avoid charging a Share Insurance Fund premium to federally insured credit unions this year or in the near future.
Even with the proposed increase to the normal operating level, the NCUA is projecting a distribution of excess equity to insured credit unions from the Share Insurance Fund in 2018. The estimated distribution to insured credit unions in 2018 is $600 million to $800 million. Thus, closing the Stabilization Fund in 2017 allows the NCUA to safely distribute funds to credit unions that can be put to work building local communities, creating new businesses and improving the lives of members across the country. Additional distributions of $600 million to $1.1 billion in total are possible from 2019 through 2022.
Please note, all of these figures are estimates. An economic downturn, a large increase in insurance losses, or other significant changes in the key drivers of the equity ratio could reduce or eliminate the projected distributions31.
In conclusion, the NCUA Board has a duty to responsibly manage the Share Insurance Fund. In its role as the steward of the Insurance Fund, the NCUA Board must meet its obligation to protect insured member deposits and faithfully uphold the responsibility that comes with being backed by the full faith and credit of the United States. Prudent administration of the Share Insurance Fund and the related protection it provides for member deposits are paramount and fundamental to maintaining a safe and sound national credit union system and public confidence in federal share insurance—which will accrue to the long-term benefit of insured credit union members, the credit union community, and taxpayers.
Closing the Stabilization Fund in 2017 helps advance all these objectives. It avoids the need for the credit union community to pay a 5- or more basis point premium to replenish the Share Insurance Fund and instead provides a 6 to 8 basis point potential distribution in 2018. Therefore, I support closing the Stabilization Fund in 2017 and setting the Share Insurance Fund normal operating level at 1.39 percent of total insured shares.
1Public Law 111-22, Helping Families Save Their Homes Act of 2009 (Helping Families Act), signed into law by the President on May 20, 2009 created the Stabilization Fund. The Act specifies that the Stabilization Fund will terminate 90 days after the seven-year anniversary of its first borrowing from the U.S. Treasury. 12 U.S.C. § 1790e(h). The first borrowing occurred on June 25, 2009, making the original closing date September 27, 2016. However, the Act provided the Board, with the concurrence of the Secretary of the U.S. Treasury, authority to extend the closing date of the Stabilization Fund. In June 2010, the Board voted to extend the life of the Stabilization Fund and on September 24, 2010, NCUA received concurrence from the Secretary of the U.S. Treasury to extend the closing date to June 30, 2021.
212 U.S.C. § 1790e(g),(h).
3This decision does not require public comment. However, the NCUA Board chose to seek public comment to be transparent and inclusive.
4For more details on the Corporate System Resolution Program, please see NCUA’s website at https://www.ncua.gov/regulation-supervision/Pages/corporate-system-resolution.aspx.
5Without considering any offsetting Insurance Fund premiums.
6The FDIC’s Deposit Insurance Fund is funded by premiums paid by insured banks. The premiums are expensed by banks when paid. In contrast, the NCUA’s Insurance Fund is predominantly funded by a deposit contributed by insured credit unions that is equal to one percent of insured shares. Even though it is considered as equity for the Insurance Fund, the one-percent contributed capital deposit is reflected as an asset on the financial statements of insured credit unions. The one-percent contributed capital deposit has certain advantages, such as increasing what is on deposit in the Share Insurance Fund as the size of the credit union system increases. However, as an asset on the financial statements of credit unions, its impairment (an expense for credit unions) is determined based on accounting rules, which are beyond the NCUA’s control. Therefore, when the Insurance Fund has losses exceeding the fund’s retained earnings, the one-percent contributed capital deposit becomes impaired resulting in an immediate expense for insured credit unions. The expense that results from the impairment of the contributed capital deposit can exacerbate the impact on credit unions of any downturn in the economy – when credit unions are already under strain from elevated loan losses and investment write-downs. This actually happened during the 2008-2009 recession. In early 2009, the equity ratio of the Insurance Fund declined to about 0.31 percent, impairing credit unions’ contributed capital deposit by 69 percent. Credit unions had therefore expensed this portion of the contributed capital deposit. The agency was about to initiate the required replenishment of the deposit, which would have required credit unions to pay the 69 basis points back into the Share Insurance Fund, when the Stabilization Fund was created in May 2009. The corporate resolution costs were then reallocated to the Stabilization Fund, thereby reversing the Insurance Fund deposit impairment and related expense to credit unions and eliminating the need to collect the deposit replenishment funds from credit unions. See https://www.ncua.gov/regulation-supervision/Pages/policy-compliance/communications/letters-to-credit-unions/2009/06.aspx and https://www.ncua.gov/Resources/Documents/LCU2009-14ENC.pdf (opens new window).
7The total Stabilization Fund assessments of $4.8 billion were charged from 2009 through 2013 as follows: 2009 - $0.3 billion; 2010 - $1.0 billion; 2011 - $2.0 billion; 2012 - $0.8 billion; and 2013 - $0.7 billion. The Stabilization Fund assessments through 2012 were necessary to pay for large debt obligations of the failed corporate credit union estates guaranteed by NCUA that were due in 2011 and 2012 that had to be repaid. Even with the funds from assessments paid by credit unions and the proceeds the estates received from the NGN sales, NCUA had to borrow $5.1 billion from its $6 billion line with the U.S. Treasury to satisfy these obligations. At the end of 2012, the Stabilization Fund’s net position was still negative $3.5 billion; that is, its liabilities exceeded its assets by $3.5 billion. It was only subsequent legal recoveries, and some improvement on the underlying Legacy Asset cash flows, that allowed for the full repayment of the U.S. Treasury borrowing. Without the legal recoveries or additional assessments, the NCUA would not have been able to fully repay the U.S. Treasury until 2021 using proceeds from the sale of the Legacy Assets. Also, based on current estimates, without the legal recoveries there would be no surplus to fund a distribution and no recovery for depleted member capital investors. The NCUA was able to achieve the large legal recoveries in part because of the benefit of the Act’s extender statute and coordination of efforts among the estates and with other government agencies.
812 U.S.C. § 1790e(h).
1012 U.S.C. § 1782(c)(3).
12The Act requires use of the calendar year-end equity ratio, and the distribution is contingent on whether the other applicable statutory conditions—such as the available assets ratio—have been met.
1312 U.S.C. § 1782(c)(3). This section is also subject to 12 U.S.C. § 1790e(e). The equity ratio is also part of the statutory basis for determining whether an Insurance Fund premium or restoration plan is necessary. The normal operating level is defined in the Act as follows: “the term ‘normal operating level,’ when applied to the Fund, means an equity ratio specified by the Board, which shall not be less than 1.2 percent and not more than 1.5 percent.” 12 U.S.C. § 1782(h)(4). Thus, the normal operating level is the level of equity the Board determines the Insurance Fund needs to fulfill its statutory role in protecting member deposits. The return of excess equity above the normal operating level is typically in the form of a distribution to insured credit unions from the Insurance Fund as provided for in the Act. Stakeholders should not confuse this with projected recoveries for depleted member capital investors’ claims against the corporate credit union asset management estates. Until the claims of the applicable estate that are senior in payout priority are satisfied, there cannot be payments made for any recoveries on depleted member capital investments. Current projections indicate it will take until 2021 for the estates to satisfy all the claims senior in priority to the depleted member capital investors.
14Increasing the normal operating level to 1.39 percent of total insured shares does not mean it has to remain at that level. The agency will continue to assess the normal operating level periodically and will adjust it as needed, consistent with the Act. Any change to the normal operating level of more than one basis point will be made only after a formal announcement and after stakeholders have had an opportunity to comment on the change. The NCUA will also issue a report that will include data and analysis supporting any future changes in the normal operating level.
15Recognizing that the risks posed to the Share Insurance Fund can vary, the Act provides the NCUA Board with the discretion to manage the Insurance Fund’s normal operating level so that it is not lower than 1.20 percent and no higher than 1.50 percent. 12 U.S.C. § 1782(h)(4)
1612 U.S.C. § 1782(c)(2)
17Id. The Act requires the NCUA to publish the restoration plan in the Federal Register. 12 U.S.C. § 1782(c)(2)(D)(iii).
18In the Federal Reserve’s Adverse scenario, the U.S. economy experiences a moderate recession, and asset prices decline. This scenario is characterized by weakening economic activity, including higher unemployment, falling short-term interest rates, long-term interest rates that slowly rise, a steadily rising unemployment rate, and sustained declines in housing prices. The Federal Reserve’s Severely Adverse scenario is characterized by a severe global recession that is accompanied by a period of heightened stress in corporate loan markets and commercial real estate markets. In this scenario, the unemployment rate spikes, short-term interest rates fall to near zero, long-term interest rates fall initially then increase slightly, and housing prices decline substantially. See Supervisory Scenarios for Annual Stress Test Required under the Dodd-Frank Act Stress Testing Rules and the Capital Plan Rule, February 10, 2017 (https://www.federalreserve.gov/newsevents/pressreleases/files/bcreg20170203a5.pdf (opens new window)).
19Setting the normal operating level too low would significantly increase the risk the NCUA Board would be required to assess a premium or develop a fund restoration plan during an economic downturn. Relying on a fund restoration plan as a part of normal fund management could erode public confidence in federal share insurance and would not necessarily eliminate the need for credit unions to pay premiums when they could least afford it. Rather, the agency should increase the equity of the fund during times of economic prosperity to avoid or reduce the need for premiums during economic downturns.
20As noted in its December 20, 2010, public notice, the FDIC’s goal in setting the designated reserve ratio (the analog for the Insurance Fund’s equity ratio) at 2.00 percent was for the Deposit Insurance Fund to be able to withstand an economic recession similar to the Great Recession of 2007-2009 and maintain a positive fund balance and stable premium rates. Designated Reserve Ratio, 75 FR 79286 (Dec. 20, 2010). While both the NCUA’s and FDIC’s approaches are in part a function of the risks posed by insured institutions to the respective funds, and by extension the taxpayer, the FDIC Board’s stated goal is to be able to withstand a severe recession without an impact on the level of premiums charged to insured banks. The NCUA’s approach seeks to ensure the Insurance Fund can withstand a moderate recession without needing to assess premiums during the recession or recovery. Managing the equity ratio to withstand a moderate recession strives for a balance between maintaining the resilience of the Insurance Fund and keeping as much funds at work in credit unions as otherwise possible, thereby accepting some risk of the need for premiums during rare occurrences of severe economic downturns. Even with a normal operating level of 1.39 percent to withstand a moderate recession, the NCUA’s projections for a severe recession indicate the Insurance Fund’s equity ratio would only fall to 1.07 percent (1.12 percent after there is no more exposure to the Legacy Assets). Thus, while a severe recession would likely necessitate assessing insured credit unions some potentially significant premiums, which could be spread out over several years under a fund restoration plan, credit unions’ one-percent contributed capital deposit is not expected to be impaired (as the equity ratio isn’t projected to fall below 1.00 percent) nor is the Insurance Fund likely to need taxpayer-funded support.
22For context, the outstanding unpaid principal balance of the Legacy Assets is $11.2 billion as of August 31, 2017. The outstanding principal balance for the NGNs is $6.2 billion as of August 31, 2017.
23To be more specific, equations were developed to link economic conditions to insured share growth and insurance losses. The relationships in these equations are based on historical data and are relatively straightforward. For example, historically, higher unemployment rates and falling home prices are associated with a rising proportion of deposits in troubled credit unions. A deteriorating economy increases the share of overall credit union deposits in troubled institutions, which in turn, typically means more losses for the Insurance Fund.
24This exceeds the statutory maximum normal operating level of 1.50 percent.
25The value reflected in the Stabilization Fund’s current net position is not solely attributable to assessments paid by insured credit unions. In fact, the increase in the value of the receivables due from the asset management estates—as a result of legal recoveries and improvements in the value of the Legacy Assets—is the predominant contributor to the Stabilization Fund’s current positive net position. The Stabilization Fund assessments paid by credit unions and the funds borrowed from the U.S. Treasury were used to pay for large debt obligations of the failed corporate credit union estates guaranteed by the NCUA. The NCUA was unable to fully repay Stabilization Fund borrowings from assessments paid by insured credit unions, which were last charged in 2013. Since 2013, the Stabilization Fund has collected enough funds from the asset management estates, principally from legal recoveries and asset sales, to fully repay Treasury in October 2016 and provide the Stabilization Fund’s current cash position. As such, the sources of funding for the assets currently in the Stabilization Fund are legal recoveries and improved Legacy asset values, not assessments.
26Credit unions funded the corporate credit unions primarily through at-risk uninsured deposits and equity capital instruments.
27At the end of 2009, troubled credit unions (CAMEL 4- and 5- rated institutions) represented 4.7 percent of all insured credit unions and held 5.4 percent of total insured shares. The level of insured shares in troubled credit unions was over five times the normal level.
28Actual Insurance Fund premium charges were 10.3 basis points in 2009 and 12.4 basis points in 2010, for a total of $1.66 billion. This should not be confused with the total of $4.8 billion in Stabilization Fund assessments charged from 2009 through 2013.
29About 60 percent of the $1.66 billion in Insurance Fund premiums charged relates to loss reserve expenses, one-quarter relates to the increase in insured shares (the denominator of the equity ratio), and the remainder was driven by other expenses that reduced the equity of the fund.
30The actual insurance losses were somewhat lower than the loss reserves established initially because the agency was ultimately successful in preventing the failure of some of these institutions, and mitigating some of the resolution costs of those that could not be saved. However, this was by no means a certain outcome at the time and may not be the case in the future.
31For example, additional potential recovery that can be recognized on the U.S. Central Capital Note of $200–$400 million; the return of $400 million in equity held for potential losses on the claim on the corporate credit union asset management estates in the event of a moderate recession; and up to $300 million in future interest and NGN guarantee fees.