Determining the Normal Operating Level

In September 2017, the NCUA Board approved a policy for setting the normal operating level, including the methodology used to determine the normal operating level. The policy and additional background information are available here.

The Board’s main objectives in setting the normal operating level are as follows:

  • Retain public confidence in federal share insurance;
  • Prevent impairment of the one percent contributed capital deposit; and
  • Ensure the Share Insurance Fund can withstand a moderate recession without the equity ratio declining below 1.20 percent over a five-year period.

Therefore, as shown in the table below, the Board has set the normal operating level at 1.39 percent to account for:

  • A 13-basis-point decline in the equity ratio due to the impact of the three primary drivers of the Share Insurance Fund’s performance;
  • A 2-basis-point decline in the value of the Share Insurance Fund’s claims on the corporate credit union asset management estates; and
  • A 3-basis-point decline in the equity ratio expected to occur prior to when the remaining NGNs begin to mature in 2020 and remaining exposure to the legacy assets can begin to be reduced. This helps ensure the 2 basis points of additional equity to account for the potential decline in value of the claims on the asset management estates is maintained in the Share Insurance Fund until they can be sold.

Development of Normal Operating Level

Component September 2018
Statutory Minimum 1.20%
Plus: Equity for Potential Decline in Insurance Fund Performance1 0.13%
Plus: Equity for Potential Decline of Value in Claims on Corporate Estates1 0.02%
Plus: Projected Equity Ratio Decline in 2018 and 2019 0.03%
Equals: Normal Operating Level 1.38%

 

The rationale, data, and process used to set the normal operating level are included in the Federal Register notice. The links below provide additional information regarding the data and assumptions used to determine the normal operating level.

 


1 Estimated decline due to moderate recession.