As Prepared for Delivery on September 23, 2021
Thank you, Eugene, for the update on the performance of the Share Insurance Fund in the second quarter. I would also like to thank everyone on your team, as well as those in the Office of the Chief Economist and the Office of Examination and Insurance, for their good work in putting together today’s Board briefing.
During the second quarter of 2021, the credit union system, as a whole, remained on a solid footing. That is good news. But, while the economic outlook also showed signs of improvement in the first half of the year, COVID-19 pandemic-relief programs have started coming to an end, and the Delta variant has led to a rising caseload in many communities in the third quarter.
Additionally, the pandemic’s economic disruptions hit lower-income households and communities of color the hardest. For those individuals, the recovery could take longer. As such, much remains uncertain for members and their credit unions in the months ahead.
The top priority for credit unions should be managing their operational and financial risks while continuing to work with members who are struggling. But, nevertheless, we ultimately should expect delinquencies and charge-offs to rise in the months ahead, and all credit unions should pay careful attention to their capital, asset quality, earnings, and liquidity. To protect the Share Insurance Fund — and, ultimately, taxpayers — against losses, the NCUA needs to stay on top of these emerging risks and problems in the credit union system.
On that note, I am pleased that the Share Insurance Fund’s equity ratio came in at 1.23 percent as of June 30. The actual ratio was within a hair’s breadth of the projected ratio of 1.22 percent. I say a hair’s breadth because we got to the actual 1.23 percent ratio by rounding up, and the projected 1.22 percent by rounding down. In making this nearly spot-on projection of less than a basis point, NCUA staff has demonstrated that we are acting as a good steward of the Share Insurance Fund.
Going forward, we need to stay focused on the equity ratio because if it falls or is projected to fall below 1.20 percent, the NCUA Board must develop a restoration plan. So, my first question is about the equity ratio. On slide 11, I see that the six-month projection for the Share Insurance Fund’s equity ratio is 1.28 percent. Does this indicate that the equity ratio is actually improving? What has been the long-term trend for the equity ratio?
Thank you for those observations. Turning now to slide 3, I see that the net position of the Share Insurance Fund is just under $5 billion. That seems like a low figure given that the credit union system is now a $2 trillion industry with $1.6 trillion in insured shares. Do we have any room for error in managing the fund? What would happen if we had several sizable credit union failures and needed to dip into the one-percent capital deposit?
This is not a hypothetical question. As I recall, during the last financial crisis, had Congress not acted to create the Temporary Corporate Credit Union Stabilization Fund, we would have had to immediately write down 69 basis points of the one-percent capital deposit. That write-down could have led to a cascade of losses as credit unions trued up their capital deposits with the Share Insurance Fund only to have other credit unions getting into trouble and another true-up occurring. Eugene, would you explain why it is essential to have sufficient reserves in the net position to handle future loss events without dipping into the one-percent capital deposit?
Thank you. I appreciate your assessment. Next, on slide 8, I see that the total assets of composite CAMEL code 3 credit unions rose for the second quarter in a row for credit unions in the asset buckets between $10 million and $1 billion in assets. What is driving this increase?
Thank you. Finally, Eugene, on slide 2, I see that guarantee fee revenue has dropped by $400,000 quarter over quarter. Is that because the NCUA Guaranteed Notes are winding down? Should we expect further decreases in this balance sheet line item in future reports?
Thank you for those insights. That concludes my remarks. I now recognize Vice Chairman Hauptman.