Credit unions to pay $1.5B to bolster NCUA’s deposit insurance fund

Like its counterparts at the Federal Deposit Insurance Corp., the National Credit Union Administration has a deposit problem.

A COVID-related deposit surge has pushed the equity ratio of NCUA’s $17.7 billion share insurance fund down to 1.22% — two basis points above the level at which the Federal Credit Union Act requires the regulator to assess a premium or develop a restoration plan.

The equity ratio was 1.35% at Dec. 31, 2019, and has not dipped below 1.3% since the middle of 2017.

The industry has seen just one failure so far in 2020, a $7.7 million-asset credit union in Beaver, Pa., so the equity ratio’s decline “is totally being driven by growth in insured shares,” Chief Financial Officer Eugene Schied said Thursday at a meeting of NCUA’s governing board in Alexandria, Va.

Between January and June, credit union deposits jumped 13%, while the share insurance fund’s capital grew 2%, according to Schied. By comparison, the average annual increase in system-wide deposits has been 4.58%.

Credit unions are required to maintain a capital deposit in the share insurance fund equal to 1% of their total deposits. To “true up” those capital deposits, the agency plans to bill institutions with more than $50 million in assets, a process expected to raise $1.5 billion, Schied said.

The added capital deposit funding should boost the equity ratio to 1.32% by year-end, said Victoria Nahrwold, NCUA’s director of risk management.

“We’re dealing with a black-swan event here,” board member Todd Harper said. “It’s something we’ve never seen before and something we couldn’t have anticipated.”

At a meeting Tuesday, the Federal Deposit Insurance Corp. reported a 9-basis-point decline in the equity of its deposit insurance fund to 1.3%, 5 basis points below its statutory minimum. FDIC’s board held off on imposing an assessment on banks in hopes deposit growth will level off.

NCUA had the option of imposing a premium, since the share insurance fund is well below its normal operating level of 1.39%, but like FDIC, it chose not to do so.

A share insurance premium would be an expensive proposition for most credit unions. If NCUA were forced to impose 5 basis-point premium, the cost for a midsize institution with about $250 million in deposits would approach $125,000 according to Nahrwold.

Harper, who said the 13-basis-point decline in the share equity ratio “gave me a start,” said in a speech Tuesday that the NCUA should be prepared to charge a premium, “should events warrant it.”

“Regrettably, it is not alarmist to foresee the equity ratio dipping below 1.2% in 2021” due to pandemic-related losses and failures, board member Mark McWatters said Thursday. “It’s unlikely we will truly appreciate the adverse economic consequences of the COVID-19 pandemic until early 2021 or later.”

NCUA set the share insurance fund’s normal operating level at 1.39% in July 2017, after merging the Temporary Corporate Credit Union Stabilization Fund into the share insurance fund. Since the merger of the two funds pushed the equity ratio above 1.5%, it resulted in payouts to credit unions totaling $736 million in July 2018.

At that time, many lobbied for a significantly lower normal operating level and larger payouts. Rejecting that pressure and opting for the 1.39% level “created, in effect, a prudent safety net reserve that may serve to protect credit unions from future assessments,” McWatters said.

In other actions, the board approved a rule deferring the requirement to obtain an appraisal in real estate transactions to 120 days following a loan’s closing date. It also approved an order exempting loans made for the purchase of property and casualty insurance from know-your-customer regulations.