As Prepared for Delivery on November 19, 2020
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. When you last briefed the Board in September, the news that the Share Insurance Fund’s equity ratio had fallen so quickly to 1.22 percent came as a shock to many. So, today’s update that the balance of the Share Insurance Fund has grown to $19.2 billion is sure to be widely welcomed.
We, however, must remain on guard going forward. The truth is: During 2020, we have experienced a dramatic rise in assets, falling loan demand, compressed interest rates, decreased earnings, and subdued consumer confidence. And, with many moving parts, there is continued uncertainty about how the economic effects of the pandemic will unfold over the long term. We must all prepare for increased member delinquencies, loan defaults, consumer and business bankruptcies and even credit union failures.
In that regard, we have a number of higher-risk credit unions that we are already closely supervising, so it seems very likely that we may see higher than average failures over the next two years. What is more, we also know that growth in credit union assets seems likely to continue to exceed the ability of the Share Insurance Fund to earn interest given the new reality of very low rates for the next few years.
Because the equity ratio seems likely to continue to drop and decline, it is really not a question of whether we will charge an insurance premium, but a question of when. If we are honest with ourselves, we do not know when. It could occur next year, the following year, or sometime thereafter. Credit unions need to brace themselves for that eventual reality.
With that in mind, I would like to turn to slide 6. This slide notes that the weighted-average yield on the portfolio was just 1.51 percent at the end of September. Eugene, I have two questions. First, what was the yield at the start of the year? Second, where might the yield bottom out in the coming quarters given the drop in interest rates?
I know that we have had a large inflow of shares into the system, for which credit unions with more than $50 million in assets have recently had to true up their one-percent deposits in the Share Insurance Fund. But, Eugene, with such a significant decline in interest rates, how much less do you anticipate the Share Insurance Fund earning in total interest per quarter between the start of the year and at the less than one percent anticipated yield, assuming that the balance of the fund continues to be $19.2 billion?
Finally, I would like to reiterate to everyone following today’s proceedings about the parameters when the NCUA Board may act and must act to charge a premium. Eugene, when must the NCUA Board charge a Share Insurance Fund premium? And, when may the NCUA Board charge a premium? So, by statute, if the Share Insurance Fund’s equity ratio remains above 1.3 percent, the Board can take no action on charging a premium this year.
As I noted at September’s briefing on the Share Insurance Fund’s performance, I think it is important that we begin a discussion with Congress about modifying the way in which we manage the Share Insurance Fund. Under its statute, the FDIC has higher reserve requirements, greater administrative flexibility, and the ability to charge risk-based premiums in managing the Deposit Insurance Fund. In my view, these are sensible policies and a better approach to risk management. 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 remain concerned about the current law’s pro-cyclicality. Although the Federal Credit Union Act requires Board action when the equity ratio falls below or is projected to fall below 1.2 percent within the next six months, charging premiums for share insurance during the midst of an economic downturn is less than optimal. We need to take steps to allow for the accumulation of greater reserves in good times to cover losses in bad times.
With more advance funding of the Share Insurance Fund, credit unions could avoid paying premiums during economic downturns like the one they seem likely to pay in the next few years. Advance funding of the Share Insurance Fund will allow them to continue lending and cover added expenses during tough times, without having the avoidable burden of paying potentially sizable premiums.