As Prepared for Delivery on April 22, 2021
I just want to publicly say that we get it. We at NCUA understand what’s happening right now. Temporary, pandemic-related factors are affecting both the Share Insurance Fund and the net worth of many credit unions.
As credit unions continue to support their members during this difficult time, many are concerned with the challenges they will face if their net worth ratio drops below the well-capitalized level.
The latest round of government relief packages accelerated the trends of unparalleled share growth in the last year. It’s no secret that nearly all this share growth is held in highly liquid, short-term, safe investments that represent little or no risk of loss. This is because a lot of this share growth is what we call “hot money,” meaning the cash arrives suddenly and may well depart suddenly. It’s like watching the tide come in. And if you didn’t know how tides work, you’d see the tide come in and thinks it will keep going and cause a flood, but fortunately we at NCUA understand what is causing this proverbial tide of share growth and we also understand what should cause it to recede.
Not to mention, we at NCUA still have other, real problems to focus on instead of pressing well-run credit unions about temporary net-worth declines that are occurring for obvious temporary reasons.
Thus, if NCUA did not provide net worth flexibility, that would have resulted in greater statutory pressure to increase yields on loans and investments to increase retained earnings and meet regulatory requirements. Pressure to reverse net worth ratio trends by reaching for yield during this unprecedented period could in fact be counterproductive.
In 2020, collectively, regular shares, share drafts, and money market accounts grew at a rate five times greater than in 2019. This has implications for credit union net worth ratios as well as the Share Insurance Fund’s equity ratio. I realize the specter of an insurance premium is weighing heavily on the minds of most credit unions. Of course, safety and soundness of the insurance fund is of the utmost importance. But I would like to remind everyone that should the Share Insurance Fund equity ratio dip below 1.2 percent, NCUA is not required to immediately charge a premium.
The NCUA is required to develop a fund restoration plan which restores the fund to 1.2 percent within eight years. Our colleagues at the FDIC recently went through this process and took a measured approach that reflects, in my opinion, the reality of the current situation. Their Deposit Insurance Fund is different from the Share Insurance Fund, but the goal is the same, safety and soundness.
The main features of the FDIC plan are the following:
- Monitor deposit balances, potential losses, and other issues that impact the reserve ratio
- Maintain the current schedule of assessment rates for all insured depository institutions
- Provide updates to its loss and income projections at least semiannually
The FDIC’s restoration plan’s assumptions were based on a range of reasonable estimates of future losses and a return to normal insured deposit growth rates. The FDIC plan projects the Deposit Insurance Fund will return to normal operating levels without any significant actions or an increase in planned premium levels. If that is true for the FDIC, it could very well also be true for the NCUA.
For those who will point out the Deposit Insurance Fund’s equity ratio is higher than that of the Share Insurance Fund, I’d like to remind everyone that the Deposit Fund’s higher equity ratio is driven primarily by banks’ greater losses and balance sheet risk. It’s worth noting that in 2020, credit unions provisioned for loan losses at an $8.5 billion annual rate, which represents $1.22 for every dollar of delinquent loans. Credit union loan delinquency was 60 basis points, down 10 basis points from one year earlier.
- We recently asked the head of a credit-union league for details that could help NCUA solve an issue that this league had raised. The issue was about examiners apparently giving CUs a tough time if their net-worth ratio fell just below the well-capitalized level due to temporary pandemic-related factors. The head of this league replied starting with “People have been a bit apprehensive to say much.”
- Why do you think CUs were ‘apprehensive’ about providing details about their experience?
- If NCUA instituted Uber-style automatic feedback mechanisms at the end of exams, and normalized recording exams, would that increase transparency, decrease it, or have no effect?
- Consider the recent adoption of body-cameras for police. It’s my understanding that good cops – that is, the vast majority – are in favor of body cameras for the transparency and accountability they provide for all parties. And while good cops are in favor of body-cameras, the few bad cops are not. I think we at NCUA know which of these we want to be.”
- During the pandemic, we’ve been working to stay flexible when addressing the consequences of rapid, unforeseen share growth. For credit unions worried that examiners will unreasonably pressure them to reverse negative trends, how do we expect examiners to talk about the net worth ratio issue?
- It occurs to me that pressure to reverse net worth ratio trends might lead some credit unions to consider more risky forms of loan products and investments. What kind of advice would you provide to boards and senior leadership beyond, ‘if the investment seems too good to be true, it probably is.’?
- What have the other financial regulators done to provide relief for pandemic-related net worth issues? Last April – as you know – the Fed excluded Treasuries and central bank deposits from their leverage ratio. The Fed let that leverage exemption expire, but they are launching a formal review of the capital rule, the “supplementary leverage ratio.” Have we examined a temporary definition of Total Assets? The NCUA Board created a temporary rule for PPP loans, could that be done for low-risk Treasuries?
Mr. Chairman, this concludes my remarks.