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NCUA Board Member Todd M. Harper Statement on the Share Insurance Fund Briefing

September 2020
NCUA Board Member Todd M. Harper Statement on the Share Insurance Fund Briefing
Board Member Todd M. Harper

Board Member Harper delivers his remarks remotely during the September 2020 NCUA Board Meeting.

As Prepared for Delivery on September 17, 2020

Thank you, Chairman Hood, and thank you, Eugene and Viki, for your candid briefing about the performance of the Share Insurance Fund during the last quarter.

Insuring the share deposits of members and safeguarding the Share Insurance Fund from losses are two of our most important duties on the NCUA Board. In recent years, we have built up the reserves of the fund in anticipation of an economic downturn.

Nevertheless, your assessment on slide 7 that the equity ratio of the Share Insurance Fund had fallen so quickly to 1.22 percent gave me a bit of a start. We are just a thin hair’s width of two basis points above the statutory trigger requiring the NCUA Board to develop and implement a restoration plan for the Share Insurance Fund. The drop in the equity ratio of 13 basis points in the first half of the year was sizable and perhaps unprecedented.

Viki and Eugene, when have we previously experienced a more than 10 basis point drop in the semi-annual calculation?

I also understand that the FDIC’s reserve ratio for the Deposit Insurance Fund – the fund responsible for covering depositor losses and administrative costs when a bank or thrift fails – had a similarly sizable contraction between the first and second quarters of 2020 because of a surge in deposits. As a result, the Deposit Insurance Fund fell five basis points below its statutory minimum equity ratio, and the FDIC has begun work to restore its Deposit Insurance Fund to the minimum level of 1.35 percent.

Viki, if the NCUA’s Share Insurance Fund were to fall five basis points below the 1.2 percent equity ratio and if the NCUA Board decided to charge a premium of five basis points in one assessment to restore the Share Insurance Fund, what would a federally insured credit union with $10 million in insured shares pay? How about a credit union with $50 or $250 million in insured shares? And what about a credit union with $10 billion in insured shares?

Now let’s turn to slide 3. In your presentation, you indicated that credit unions will soon “true up” their one percent capitalization in the Share Insurance Fund. How does the true up work? How much money do we anticipate coming into the Share Insurance Fund? And what would be the total assets of the Share Insurance Fund after the true up?

If we could, please move to slide 6. In a speech earlier this week, I said that because of the coronavirus-induced economic fallout, we must all prepare for increased member delinquencies, loan defaults, consumer and business bankruptcies and even credit union failures. If one or more insured credit unions fail in the months ahead, we may need to quickly access the reserves in the Share Insurance Fund portfolio to cover insured deposits. Moreover, we will need to wind down the NCUA Guaranteed Notes program in the near future.

In recent months, I have often encouraged credit unions to take steps to ensure that they have access to liquidity and encouraged them to join the Central Liquidity Facility. But, I am now interested in learning more about how we manage the liquidity in the Share Insurance Fund to cover such knowns as the NCUA Guaranteed Notes wind down and the unknowns of credit union failures over the next year.

Eugene, would you walk me through whether we have sufficient liquidity? Additionally, what might happen if we had the failure of a large credit union? How would we access the additional money in our reserves and at what price?

Now, please turn to slide 13. Viki, over the coming year, can we anticipate the distribution of assets by CAMEL code to remain the same as it was in the last quarter or will it move like it did after the 2008 financial crisis?

We may very well be seeing the calm before the storm.

Finally, I know that under your leadership, Eugene and Viki, the NCUA staff are actively modeling the effects of the dramatic rise in assets, falling loan demand, compressed interest rates, decreased earnings, and subdued consumer confidence. There is, however, great uncertainty about how the economic effects of the pandemic will unfold over the long term. After all, we have many moving parts.

In the short term, the NCUA Board must be prepared to charge a Share Insurance Fund premium, should future events warrant it, and credit unions need to be made aware of that reality. But in the long term, I think it is important that we begin a discussion with Congress about modifying the way in which we manage the Share Insurance Fund.

In managing the Deposit Insurance Fund, under its statute the FDIC has higher reserve requirements, greater flexibility, and the ability to charge risk-based premiums. In my view, these are sensible policies. The agency, therefore, should review its options and reach a conclusion about what statutory changes make the most sense for us to pursue.

Additionally, I am concerned about the current law’s pro-cyclicality. Although the Federal Credit Union Act requires Board action when the equity ratio falls below 1.2 percent, charging premiums for share insurance during the midst of an economic downturn is less than optimal. Viki, would you discuss the benefits of putting the Share Insurance Fund on a countercyclical footing? And, would you outline how increased flexibilities for the NCUA in managing the fund might improve its performance?

As a former Boy Scout, I long ago learned that the best time to repair a roof is when the sun is shining. Why wait for storm clouds to roll in before we build reserves? Moving forward, the NCUA should seriously consider how we could allow for the accumulation of reserves during good times to cover losses in bad times without falling below the minimum statutory equity ratio. With more advance funding of the Share Insurance Fund, we would be helping credit unions avoid paying premiums during economic downturns. Doing so will allow them to continue lending and cover added expenses during tough times.

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