As Prepared for Delivery on September 17, 2020
As I have previously noted, I am apprehensive about the downward trend in the Equity Ratio. It is my understanding that the reduction referenced in today’s briefing was caused, in part, from an increase in the denominator of the Equity Ratio fraction triggered by COVID-related “flight to quality” share growth and that this downward pressure is projected to reverse, in part, at the end of the year as the new 1% capital deposits are funded by the credit union community. My concern continues into 2021 and is driven by a repeat of the share growth/ 1 percent capital deposit timing mismatch, plus – more importantly – the potential decrease in the numerator of the Equity Ratio fraction caused by COVID -related credit union losses and failures and the continuation of the low interest rate environment. The latter two issues may not reverse by the end of 2021, as their resolution is dependent upon the underlying financial strength of the credit union system, the overall health of the economy, and monetary policy.
Regrettably, it's not alarmist to foresee the Equity Ratio dipping below 1.20 percent in 2021, with far reaching statutory consequences, including the possibility of future credit union premium assessments. It’s also unlikely, based upon current analysis, that the adverse trend in the Equity Ratio will be offset by excess funds derived from the maturity of the final NCUA Guaranteed Notes, or NGNs, in 2021.
The NCUA should work with all constituencies of the credit union community to address these critical issues in a transparent manner so as to mitigate the need for future premium assessments, particularly during the period in which credit unions are operating with the negative economic consequences of the COVID-19 pandemic. The agency should also continue to thoughtfully and thoroughly monitor the liquidity and capital needs of credit unions throughout the system and further refine its contingency plans, as appropriate. As it’s unlikely that we will truly appreciate the adverse economic consequences of the COVID-19 pandemic until early 2021 or later, we should remain vigilant and prepared to modify our modeling methodologies and strategic and tactical responses as the facts and circumstances develop.
It is worth noting that the Normal Operating Level and Equity Ratio both equaled 1.39 percent following the merger of the Temporary Corporate Credit Union Stabilization Fund into the National Credit Union Share Insurance Fund. At that time, some advocated for the NCUA to set the Normal Operating Level at or below 1.30 percent and distribute funds so as to drive the Equity Ratio down to that level. Some even spoke of setting the Normal Operating Level and Equity Ratio at, or much closer to, 1.20 percent. If the Board had voted to follow that approach, the Equity Ratio would surely have fallen to well below 1.20 percent by now with the heightened likelihood of material credit union premium assessments.
By increasing the Normal Operating Level and Equity Ratio to 1.39 percent when funds were readily available from the merger of the Stabilization Fund into the Share Insurance Fund, the Board created, in effect, a prudent safety net reserve that may serve to protect credit unions from future assessments at a time of economic stress when they are least prepared to fund additional premiums. If assessments are nonetheless required, the safety net reserve should lessen the blow. These reserves were designed and implemented to protect against adverse consequences arising from credit union losses and failures, economic downturns, unknown unknowns, and Black Swan events, such as the COVID-19 pandemic. It’s fortunate that the reserves have been available to the agency and the credit union system during the pandemic.