As Prepared for Delivery on May 20, 2021
Thank you all for that excellent presentation. And in case anyone is interested: because today’s equity ratio projection of 1.22 percent is close to triggering a restoration plan, I checked the math out to more decimal places and it’s 1.2197 percent, so basically bang-on at 1.22 percent.
So, to review, the Federal Credit Union Act says the Share Insurance Fund’s formal operating level is set between 1.20 percent and 1.50 percent. That’s the one thing we can’t change.
- Current policy is that if the Share Insurance Fund’s equity ratio lands between 1.20 and 1.30 percent, the Board has the discretion to assess a premium to bring it back up to 1.30% but no higher. That’s the range we are in today.
- And current policy is if the fund’s equity ratio goes above 1.38, a distribution to credit unions is required. That’s because 1.38% is where we’ve set our Normal Operating Level.
As the Chairman mentioned, when the ratio is between 1.3 percent and 1.38 percent, no premium can be assessed nor is a distribution required. That range is our purgatory, where credit unions have some certainty that they won’t have to write a check to NCUA nor get a check from NCUA.
But today’s Request for Comment is all about what NCUA should do anywhere between 1.2 and 1.5 percent. We want to hear what folks think should occur at the various points in between those two goalposts. When should distributions be required and when should there be some flexibility? For that matter, what calculations should we use.
We’re essentially seeking comment on who sends money to whom, how much they send and when they should send it.
Let’s be clear that all of the money involved here belongs to credit union members. For those of us who are children of divorce, this debate can feel like a bit like custody arrangements. When does a dollar go live at the Share Insurance Fund and when does it go back to stay with the credit union?
The central tension involves two compelling yet opposing factors:
- If our policy pushes the equity ratio too high, then we’re parking money in the Share Insurance Fund that could be used to serve the needs of credit union members. In addition, any money in the Fund just going to be invested in Treasury bonds, earning a lower average return than it would if credit unions had that money. So, in the long run, every “excess dollar” that sits at the Share Insurance Fund means the credit union system, as a whole, gets poorer as a result.
- On the other hand, if we decide to keep the equity ratio too low, then we’d all constantly be in today’s situation. We’d always be one small move away from dipping below 1.2 precent and credit unions would always have a possible premium assessment hanging over their heads. That kind of uncertainty isn’t helpful for credit unions nor for the NCUA as an insurer.
Balancing these tensions is what the request for comment is all about.
A key point I’d like to emphasize is that we welcome any constructive thoughts on our Net Operating Level, so please don’t feel bound by the way we may have framed the issued in the Request. NCUA staff has prepared a thoughtful, professional request for comment. But if you’re sitting out there with ideas that don’t fit our framework, I encourage you to send them anyway. If your suggestion is unfeasible, then ‘no harm, no foul.’ I only say this because the normal operating level is so important that we are obliged to listen to any quality feedback, regardless of how we’ve written the request.
Lastly, over the last few months, one thing I’ve been struck by when I speak to credit unions is just how binary people view the prospect of a Share Insurance Fund restoration plan. Regardless of what we say about how flexible a restoration plan would be regarding possible premiums, any talk of a Restoration Plan lands like a meteor. I’ve sensed that even when suggesting that any restoration plan could state that there would be zero premiums so long as the economy normalizes, and the equity ratio rises in the manner many expect.
But I’ve come to understand the way credit unions view this, a perspective shaped by two fairly obvious facts:
- First, the moment that Restoration Plan is forthcoming, credit unions have to change their planning to account for a possible premium assessment, however unlikely it is to occur.
- As for the second reason why any talk of a Restoration Plan causes concern…well, I’ll just call it human nature. NCUA will determine if credit unions have to write us a check. Credit unions aren’t in control of that decision. And anytime you may have to send someone money, and they – not you - get to make that decision, it’s no mystery who is more nervous about the situation.
Maybe we at the NCUA should make changes to the normal operating level. Maybe we shouldn’t. But as fiduciaries of the Share Insurance Fund, this request for comment feels like the right thing to do and the right time to do it.
Mr. Chairman, this concludes my remarks.