As Prepared for Delivery on November 18, 2021
Since the NCUA staff budget for 2022 was just posted yesterday, I must begin my comments on the staff proposed budget for 2022. This budget adds nearly 50 new employees in 2022, which matches the yearly staffing increases we saw during the Great Recession. I do not think we need nearly 50 new staffers at the agency, so this budget is not something that I can support in its current form. Additionally, I also do not see how I can support a budget that does not return money from the Operation Fund back to credit unions in a significant way. Still, I am willing to work with my fellow Board members on this. It will be a busy couple of weeks to reach an agreement on the budget, and I look forward to working with my fellow Board members in pursuit of this goal.
My preference is to cut the NCUA’s budget year over year, something that should not be difficult to do because we have so much money remaining in the current budget for travel. After all, as I have said on many occasions, the NCUA is funded by the credit unions we regulate, and we must be responsible stewards of this money.
Now shifting gears to the topic at hand, the NCUA’s insurance model is a very different premium model than the FDIC’s model, given insured banks do not submit contributed capital like credit unions. Under the Federal Credit Union Act, credit unions are legally committed and bound to update a large majority of the Fund’s equity contribution — one percent of the credit union’s insured shares. Credit unions today provide the bulk of the capital contributions that are the basis of the Fund’s soundness. I have repeated this statement at previous Share Insurance Fund quarterly Board updates. Why do I believe it’s worth repeating this again? Because I believe it is helpful for all of us to remember that the one percent capital deposits, which comprise most of the Fund’s equity, is also an asset of the credit union. Keeping this as our North Star only helps us be more effective stewards of the Fund we oversee.
As I have said repeatedly, I believe it is time for the Board to consider changes to our investment strategy and to make this strategy public. In my view, the Share Insurance Fund investments serve three important purposes. These purposes are:
- Manage funds to optimize yield to cover the operating costs of the Share Insurance Fund;
- Manage funds to ensure liquidity is sufficient for forecasted needs pursuant to Title II of the Federal Credit Union Act – meaning the Board’s responsibilities as deposit insurer;
- Manage funds to pay equity above the Normal Operating Level to credit unions, and ultimately the credit union member-owners, as a dividend in addition to our principal obligation under the Act to provide for deposit insurance for credit unions, including resolving and paying insured claims of failed credit unions.
In my view, the investment policy approved by the Board should tie into one of these purposes. With so much investment income at stake, the investment policy should be reviewed regularly by the Board.
Eugene discussed our investment policy earlier and what we are doing to make it public. I appreciate the work we plan to do to update the policy and to make it public. In my view, we could further enhance transparency, and this goes a long way to do so.
In terms of investments, I believe we should map the Fund’s performance versus the three investment objectives and review and revise it regularly. I do have some specific questions related to our investments:
- In the context of periodic investments, what are the benefits of a ladder strategy for the Share Insurance Fund and the industry?
- Have we ever considered a 10-year ladder?
- For the record, do we do an interest rate risk “shock test” to the Fund as we do for credit unions under our supervision? And do we do a cash flow forecast on a regular basis as well?
As I consider our investment strategy, we should note that examining portfolios and managing investments in the portfolio are two different skill sets. The NCUA has over $20 billion in investments under management, so I think we should have an even greater focus on this during our Share Insurance Fund updates.
I do have some final questions to ask:
- When I have reviewed the information, there has been no expense to increase the loss reserve this year, which reflects the safety and soundness of the system. Can you elaborate on this?
- There have been net recoveries in the loss reserve because of reversals of prior loss estimates. Would this appear to be the situation through November?
- On a related point, how much has been sent to credit unions so far from the estates of the failed Corporates? What are the estimated remaining amounts to be collected and distributed?
I believe the NCUA needs to continue to make timely distributions to the claimants while maximizing recoveries and mitigating exposure to the Fund.