As Prepared for Delivery on May 26, 2022
Thank you, Eugene, for the update on the performance of the National Credit Union Share Insurance Fund in the first quarter of this year and for the overview of the Fund’s projected equity ratio. And, thank you, Rick, for joining us for questions. I would also like to thank each of your teams for their work on this briefing.
Before addressing the subject at hand, I would first like to congratulate everyone across the NCUA for their contributions to our award-winning 2021 Annual Report to Congress, especially those who work in the Office of the Chief Financial Officer, the Office of External Affairs and Communications, and the Office of the Chief Economist. As Eugene noted, the NCUA’s annual report received the Certificate of Excellence in Accountability Reporting (CEAR Award) from the Association of Government Accountants. This is the NCUA’s fifth CEAR Award.
This track record of excellence is a meaningful and important demonstration of the NCUA’s successful performance and financial management over the years. It is also a testament to the incredible work of employees across the agency. And, it demonstrates — to the President, Congress, credit unions, members, and the general public — the NCUA’s firm commitment to achieving our mission, safeguarding the resources entrusted to us, and maintaining the highest levels of transparency and accountability. Thank you, all, for a job well done.
Turning now to today’s briefing, the Share Insurance Fund continued to perform well in the first quarter. Quarterly net income rose by approximately $42 million due to the continued reduction of expected losses associated with the remaining legacy assets of the Corporate System Resolution Program. That is positive news. We are now seeing a normalization of the Share Insurance Fund’s performance to what it was before the Board decided to fold the Temporary Corporate Credit Union Stabilization Fund into the Share Insurance Fund.
Although the equity ratio sits below an ideal level, it remains relatively stable. Staff forecast an equity ratio of 1.25 percent as of June 30, down slightly from 1.26 percent at year-end 2021. This estimate places the equity ratio between the Fund’s statutory minimum of 1.20 percent and the Board-approved normal operating level of 1.33 percent. Nevertheless, we continue to see a slow, steady decline of the equity ratio due to continued elevated insured share growth and low interest rates, at least from a historical perspective.
As such, the NCUA Board must continue to monitor the Share Insurance Fund’s performance and remain ready to act. Such monitoring includes assessing the effects of the changing interest-rate environment on the Fund’s portfolio. We already see the effects of rising interest rates on the Fund’s balance, as we recorded unrealized losses in the first quarter.
However, as noted earlier, the Share Insurance Fund’s investment portfolio is valued based on the market, even though the NCUA’s practice is to hold investments to maturity. The changes in the value of these assets were expected. This is because as interest rates go up, the value of these bonds goes down. These unrealized losses, fortunately, do not impact the equity ratio and do not increase the likelihood of a premium, just as unrealized gains do not increase the equity ratio.
What the unrealized losses signal is a change in the interest-rate environment moving forward. To address this issue, the NCUA is adjusting its investment strategy from a seven-year ladder to a ten-year ladder. That brings me to my first question. Eugene, how do increasing inflation levels affect the Share Insurance Fund and the equity ratio?
Thank you. Your response demonstrates the soundness of the NCUA’s practices when it comes to managing the Share Insurance Fund’s assets. My next question concerns the extended investment ladder you described in your presentation. What would the schedule of maturities look like each year with an extended-ladder approach?
Thank you for the clarification. Given the changing interest-rate environment, our stakeholders need to understand how the Share Insurance Fund’s portfolio will be structured to ensure its continued health and stability.
My last question concerns the change in the number of composite CAMEL code 4 and 5 credit unions, as noted on slide nine. Compared to the previous quarter, large credit unions are moving out of troubled CAMEL categories. That is very good news. However, Eugene, are we out of the woods just yet? Could there be other risks building within the system?
With continued supply chain issues, economic uncertainty, the geopolitical turmoil created by Russia’s war in Ukraine, and rising interest rates, credit unions must closely monitor their balance sheets and portfolios in the months ahead.
As I have often noted, a credit union’s ability to manage interest-rate risk will remain a crucial factor in its performance going forward. Credit unions, therefore, must pay careful attention to the fundamentals of capital, asset quality, earnings, and liquidity. Now is the right time for credit unions to review their policy limits and potential exposures. Credit unions should also remain disciplined in managing unique institutional risks as we navigate through this changing economic and interest-rate environment.
Finally, the NCUA is aware of industry concerns about how examiners will supervise for market risk, given rising interest rates. Interest-rate risk has long been a supervisory priority for the NCUA. We know that credit unions have planned accordingly for changes in interest rates over the years, even more so since the last update in the NCUA’s supervisory procedures in 2017.
The NCUA, as a result, is now developing guidance for examiners on how to work with credit unions whose sensitivity to market risk and other risks has increased due to the ongoing uptick in interest rates and related economic uncertainty. We will continue to treat all credit unions equitably during the examination process in the months ahead.
That concludes my remarks. I now recognize Vice Chairman Hauptman.