As Prepared for Delivery on May 20, 2021
Thank you for today’s presentation. I think we should be very careful in changing the structure of the normal operating level. That’s not to say that no changes are warranted. However, history is an important guidepost. As is the fact that our system is different than the FDIC’s. As it should be. The risk profile is different between credit unions and banks. And we have a cooperative system in the way the normal operating level and Share Insurance Fund are built— by design.
With that being said, I am open to normal operating level changes based on the evidence but while acknowledging the history of the normal operating level, Share Insurance Fund, and the cooperative system we regulate. And while we are different from the FDIC’s Deposit Insurance Fund--and should be--I am not opposed to considering using some of the tools they have if the evidence suggests it is worthwhile and that these respective tools work for the cooperative system we oversee. Obviously, some changes would require Congressional approval.
Let’s take a walk back through history:
- Was the normal operating level adjusted during the 2008 - 2009 financial crisis?
- In the history of the fund, what was the worst loss charged to the fund by a single peril, when was it, and what was the event that caused this loss?
- When the normal operating level was raised to 1.39 in 2017, wasn’t one of the reasons for “insurance losses”? So, I can assume this includes the taxi medallion losses, a concentration of these loans which hit the SIF particularly hard?
- And this taxi medallion event to the Fund is generally resolved from a Share Insurance Fund standpoint, correct?
Thank you. I know we are still monitoring for economic risks associated with the pandemic, but given the current posture of the Fund, I believe it is worth studying which risks need to be considered by the NCUA Board when deciding the Fund’s normal operating level. The losses incurred to the Fund by the taxicab medallion loan concentration should be viewed in the rearview mirror in my view, and it should not be factored into the normal operating level at present.
Shifting gears to the corporate stabilization fund,
- Since this fund was transferred to the Share Insurance Fund in 2017, I would venture to say there is a very low risk today, in 2021, presented to the Share Insurance Fund for this being on the Share Insurance Fund’s books. The risk is certainly much lower today than it was in 2017. Mr. Chairman, I believe it is worth considering if this risk should be still considered in calculating the normal operating level in 2021. Again, I welcome the public’s comments on this point.
As we all know, the stabilization fund for corporates was its own fund and it had its own assessments before getting merged into the Share Insurance Fund in 2017—and transferring the risk from the U.S. Treasury to the Share Insurance Fund. Many of the legacy assets of the corporates have significantly improved in value or are projected to continue to improve in value as we wind down the Corporate System Resolution Program. This brings me to another point. When my office asked Blackrock, which is supporting NCUA’s work on resolving the corporate estates for the agency, the most important take away for the agency as we wind down the corporate crisis should we go through something similar in the future. Blackrock’s answer, and I quote, “patience.” Patience. I am certainly taking this to heart.
Today, we are recognizing recoveries in the corporate estates that we wouldn’t have considered remotely possible even a decade or so ago. And I especially look forward to closing out the corporate estates as soon as possible, for many reasons. One of which is that it will be important to determine how well the normal operating level and for that matter the Share Insurance Fund was positioned going into the Great Recession and these data points will be useful in determining that.
I think we will find once we know all of these data, in every situation we faced including the 2008 crisis, and the highwater mark of the taxi medallion losses for the Fund, the cooperative structure of the Fund and the flexibility it provided, including the cooperative structure, has been generally adequate, including the normal operating level’s structure. But let’s follow the evidence based on data.
Mr. Chairman, one thing I really welcome comments on from the public, and I know this has been an interest to you as well, is this: is there a better way to avoid charging premiums in the midst of a crisis--such as during the Great Recession? I very much welcome the public’s feedback on this point.
Again, Mr. Chairman, we must recognize that our model is a very different premium model than the FDIC’s model. Credit unions are legally committed and bound to update a large majority of the Fund’s equity contribution. Credit unions today provide the bulk of the capital contributions that are the basis of the fund’s soundness. It’s a cooperative insurance system that we run at the NCUA.
I do have a few more questions to conclude:
- For the premiums charged in 2009 and 2010, what was the dollar amount charged to credit unions in the aggregate over these two years?
- What did the agency charge off for estimated loss reserves in 2009 and 2010 for anticipated losses to the Fund?
- As I begin to close, Mr. Chairman, the equity ratio is affected by the amount we hold in reserves for losses. So, let’s keep in mind, the higher the figure we have in reserves, the lower the equity ratio. The Vice Chairman often talks about incentives. As he puts it, “you get what you incentivize”. Moving forward, I would like to see if we can better incentivize the loss reserves with actual losses incurred. Again, we can’t be clairvoyant, but we can better align incentives.
My final question, is this: on what basis should the Board adjust the normal operating level under the current law?
I appreciate your indulging me today. The Fund we run is credit unions’ members funds. Not ours—we are just stewards. So, this was an important conversation. I have no further questions or comments, Mr. Chairman.