The National Association of Federally-Insured Credit Unions (NAFCU) and other organizations responded to the National Credit Union Administration’s (NCUA) request for comment on the policy and methodology used to set the National Credit Union Share Insurance Fund’s (SIF) normal operating level (NOL).
NCUA’s policy for setting the NOL was updated in 2017 and established a periodic review of the equity needs of the SIF. It also closed the temporary corporate credit union stabilization fund, distributing its funds, property, and other assets and liabilities to the SIF, and set the NOL at 1.39 percent. Prior to this, the NOL was set at 1.3 percent.
The review of SIF occurs annually, and the NCUA board only acts when a change in the NOL is determined to be necessary. The board determined the current economic landscape and the pending events related to corporate asset management estates and the NCUA guaranteed note (NGN) program warranted a re-evaluation at this time.
Any change in the NOL of more than one basis point can only be made after a public announcement of the proposed adjustment where interested parties are given the opportunity to comment. When setting the NOL, the NCUA board will consider objectives such as retaining public confidence in federal share insurance; preventing impairment of the 1 percent contributed capital deposit; and ensuring the SIF can withstand a moderate recession without the equity ratio declining below 1.2 percent over a five-year period.
NAFCU Vice President of Research and Chief Economist Curt Long encouraged the NCUA to establish a methodology that is consistent and transparent, acknowledges the impact of the maturity of the NGNs, and brings the NOL closer to the traditional level of 1.3 percent.
“Recently, in order to bolster credit unions’ ability to manage their money and shares on deposit, as well as to protect the equity ratio of the SIF, NAFCU has called for additional investment authorities,” Long wrote. “The board should determine that a credit union may temporarily engage in additional investments that share a rational nexus to those explicitly outlined in the FCU [Federal Credit Union] Act, do not pose more risk than those activities explicitly authorized by the FCU Act, and are essential to carrying on the credit union’s operations.
“This would ensure that credit unions and their members are well-positioned to endure the difficulties of this unprecedented time.”
Long stated the NOL methodology should be based on a moderate recession scenario over a 3-year period. This is because when the NCUA adopted its current NOL methodology, it was based on a five-year forecast horizon to “cover the cycle of an economic downturn and the life of the NGN program.” The final payment of NGN investors has been made, and so the latter should no longer be considered.
“While a certain amount of uncertainty is inherent in forecasting, extending the forecast horizon to five years strains the credibility of the process,” Long stated. “Not only is the economic scenario itself more likely to diverge from whatever the next actual recession looks like in those later years, but the path of recovery for the industry also grows more uncertain over time. It is worth noting that the stress test scenarios published by the Federal Reserve, on which the current NOL methodology is based, only extend 13 quarters.”
Other commenters included the Credit Union National Association (CUNA) and local and regional credit unions.
CUNA called for the NOL to be returned to 1.3 percent as well, as the reasons for its increase are no longer relevant in today’s economic environment. The association also said it believed the SIF can withstand a moderate or even severe recession, as it has performed will during the two moderate recessions and one severe recession since its capitalization in its current form.
“We generally believe a moderate recession is an appropriate basis for evaluating the [SIF] performance during an economic downturn,” the NCUA stated. “Specifically, we recommend the NCUA set the NOL at a level sufficient to withstand a moderate recession and remain at or above 1.2 percent of insured shares over a two-year forecast horizon. This would be consistent with the successful NOL policy established by the board in 2007 that continued until amended in 2017.”