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NCUA Chairman Todd M. Harper Remarks at the NAFCU Congressional Caucus

September 2022
NCUA Chairman Todd M. Harper Remarks at the NAFCU Congressional Caucus

As Prepared for Delivery on September 14, 2022


Good morning, everyone. Thank you for that warm welcome. And, thank you, Greg, for the kind introduction, and to NAFCU for inviting me to be here with you today.

Greg, you and I have known each other for many years. I have always appreciated your insights and efforts to find common ground on policy issues, where possible. In fact, our joint efforts while working on Capitol Hill to develop a bipartisan package to combat predatory lending laid the groundwork for many reforms that ultimately became law in the Dodd-Frank Wall Street Reform and Consumer Protection Act.

I am usually reluctant to pack my remarks with statistics, perhaps even more so as I’m among the last speakers on the final day of this Congressional Caucus. A speech filled with too much data is often a leading contributor to late morning naps. However, I believe in this case, industry statistics tell an important story about the state of the credit union system and its prospects for the future.

2022 Q2 Performance Data

Last week, the NCUA released Credit Union System Performance Data for the second quarter of 2022. Overall, the numbers point to a healthy credit union system that is facilitating the ability of households to achieve their financial goals. For example, the industry’s aggregate net worth ratio grew to 10.42 percent, which represents a recovery of 40 basis points from a pandemic low of 10.02 percent. And, at the end of the second quarter, we recorded a 16.2 percent year-over-year increase in credit union loans. We have to go back more than two decades to see loan growth of this magnitude.

As you all know, the credit union system has experienced significant growth in size and complexity during the last 10 years. This evolution is especially apparent in the number of large and very large credit unions in existence today. For example, the most recent quarterly data shows that the number of federally insured credit unions with assets of at least $1 billion increased to 412 in the second quarter of 2022.

Together, these billion-dollar-plus credit unions held $1.6 trillion in assets. That’s three out of every four dollars within the system. And, following a longstanding pattern, these credit unions reported the strongest growth in loans, membership, and net worth over the year ending in the second quarter of 2022.

But, that’s not the entire story.

We have also seen declines in the credit union system’s net income and returns on average assets, rapidly rising interest rates, and continued inflationary pressures. And, we have identified growing liquidity concerns at individual institutions within the system.

Therefore, credit unions of all types and sizes must remain diligent in managing safety and soundness as we continue to navigate the challenging economic environment ahead of us.

Preliminary RBC and CCULR Findings

As such, it is critical for large credit unions to monitor and maintain adequate capital levels, so the system can withstand future crises and continue to serve members with minimal disruption. Capital, after all, is the first line of defense against losses.

Not too long ago, the credit union system absorbed hundreds of millions of dollars in losses at several federally insured credit unions that concentrated heavily in taxi-medallion lending. Fortunately, about the same time, we had won multiple lawsuits brought against those parties which had sold faulty mortgage-backed securities to the failed corporate credit unions. That legal windfall allowed us to cover the more than $765 million in direct losses to the Share Insurance Fund brought about by the taxi medallion crisis and allowed us to avoid charging hefty premiums to federally insured credit unions to cover those losses.

But, luck rarely occurs twice. And, we can’t count on being so lucky in the future. That’s why I have long held that all financial institutions backed by federal share and deposit insurance, including federally insured credit unions, should hold capital commensurate with the risks held on their balance sheets.

And, the recently amended 2015 risk-based capital rule requires credit unions do just that. For complex credit unions, which the NCUA Board currently defines as having at least $500 million in assets, a robust risk-based framework is a fundamental part of doing business. Should one of these credit unions fail, the additional capital buffer afforded by such a framework would protect surviving credit unions, their members, and the taxpayers who ultimately guarantee the National Credit Union Share Insurance Fund.

To facilitate complex credit unions’ adoption of a strong, risk-focused capital adequacy framework, the NCUA has prioritized regulatory measures that strike a balance between maintaining strong capital levels, protecting safety and soundness, and simplifying implementation.

To that end, the NCUA Board approved the Complex Credit Union Leverage Ratio final rule, also known as CCULR, last December. The CCULR framework relieves complex credit unions that satisfy specified eligibility criteria from calculating the risk-based capital ratio. In exchange, these credit unions must maintain a higher net worth ratio than otherwise required for the well-capitalized classification.

The overarching intent of the revised framework is to reduce the likelihood of a relatively small number of high-risk outliers exhausting their capital and causing systemic losses, which, by law, all federally insured credit unions would have to pay for through the Share Insurance Fund. The CCULR rule is a balanced approach that gives complex credit unions a risk-based capital framework comparable to those developed by the other federal banking agencies and consistent with the Federal Credit Union Act. It also strengthens the system’s capital levels and provides complex credit unions with a streamlined approach to managing their capital within the system of cooperative credit.

And, the second quarter data illustrates the strong uptake of this new option. Nearly three-quarters of eligible complex credit unions have opted into the CCULR framework, and the overall number of those opting in increased by 18 since the last quarter. As of June 30, 2022, there were 703 complex federally insured credit unions with assets totaling approximately $1.8 trillion, representing 85% of total assets of federally insured credit unions. More than half of those assets belonged to institutions opting into the CCULR framework, with an average CCULR ratio of 11.35%. The remaining credit unions reported under the RBC framework with an average RBC ratio of 15.39%.

In conjunction with NCUA’s final rules on subordinated debt and derivatives, the CCULR and RBC rules promote responsible and robust capital levels across the credit union system. This increased capital reserving is a success story should be told more often, because it will not only better protect the system from future losses, but it will also minimize the premiums that all surviving credit unions will need to pay when a large, complex credit union fails in the future.

Need for CLF Agent Membership Adjustment

And, let’s not forget the unique challenges smaller credit unions may often face, including lower returns on assets; declining membership; increasing non-interest expenses; and, perhaps most of all, a lack of succession planning for boards and key personnel.

Because of their limited balance sheets, smaller credit unions are at the greatest risk of unexpected liquidity needs. As a result, they are more likely to need access to emergency funds should a systemic liquidity event occur. However, most smaller credit unions cannot directly subscribe to the Central Liquidity Facility, or CLF for short, due to the cost to join and limited capital tied up in competing uses.

This is why the NCUA Board has consistently advocated for allowing agent members of the CLF to purchase capital stock for a subset of credit unions served. By permitting corporate credit unions to become agent members for groups of credit unions, rather than requiring they join for their entire membership, the CLF becomes a more affordable and attractive option for corporates to participate in. And, without that agent membership, small credit unions will likely not have access through the corporates.

Now, time is of the essence. As interest rates have rapidly increased, we have begun seeing liquidity issues at individual credit unions within the system. These credit unions have enough capital to remain solvent, but they may get caught in a vice by not having access to that capital when needed. The liquidity that the CLF can provide bridges that divide.

The CLF is an important tool for credit unions to have to manage these interim shortfalls in available resources. If Congress decides in the coming weeks and months against reinstating the NCUA Board’s recommended provisions allowing for this greater flexibility, there will be an immediate reduction of $9.7 billion in reserve liquidity for the credit union system.

Furthermore, emergency liquidity needs must be addressed quickly before corporate credit unions eliminate current access for 3,648 smaller credit unions in the fourth quarter of 2022. These smaller credit unions include most of the nation’s 509 Minority Depository Institutions that serve as lifelines to underserved areas and communities of color.

We all understand that in times of economic instability, liquidity protects both the credit union system and the financial services sector, which is why the CLF Agent Membership adjustment is so critical. As such, the NCUA will continue our efforts to educate lawmakers about the need for the extension of these sensible reforms put in place at the start of the pandemic.

Interest Rate Risk

And, a liquidity event is a real possibility as interest rates continue to rise, which, in turn, heightens interest rate risk. Substantial, sudden changes in inflation, the interest rate environment, and broader economic conditions call for extra vigilance. With continued elevated inflation rates, economic uncertainty, and the geopolitical turmoil created by Russia’s war in Ukraine, credit unions must closely monitor their balance sheets and portfolios in the months ahead.

A credit union’s ability to manage interest rate risk will remain a crucial factor in its performance going forward. So, credit unions must pay careful attention to the fundamentals of capital, asset quality, earnings, and liquidity. Now is the perfect time for credit unions to review their policy limits and potential exposures.

The NCUA is also aware of industry concerns about how examiners will supervise for market risk, given rising interest rates. During the first half of 2022, this country experienced the sharpest increase in interest rates in decades.

Interest rate risk has long been a supervisory priority for the agency and earlier this month, we issued a Letter to Credit Unions announcing changes to how the NCUA will supervise for interest rate risk. Among other things, these recently announced changes clarified when the issuance of a document of resolution to address interest rate risk is warranted. We also provided examiners with more flexibility in assigning supervisory risk ratings for interest rate risk. We will continue to monitor changes in the interest rate environment, and we stand ready to take further prudent actions, if needed.

Third-Party Vendor Authority

Considering the risks impacting the credit union system that I’ve mentioned today, restoration of the NCUA’s statutory authority over third-party vendors, including Credit Union Service Organizations, has taken on greater urgency.

Credit unions must partner with third-party vendors to enhance the products and services they provide to their members. And these partnerships can make programs cost-effective, enable credit unions to access expertise, and allow for products and services that may not be feasible if provided independently. What is more, the pandemic has accelerated the industry’s movement to digital services, leading to increased credit union reliance on vendors.

Given this evolution, the 2001 expiration of the NCUA’s statutory third-party vendor authority has resulted in a continuously growing regulatory blind spot that is untenable as the economic environment has grown more turbulent and risks to the system have multiplied. This blind spot, combined with the increasing risk of cyberattacks, is what keeps me up at night. That an event could happen to disrupt our system when it could have been avoided.

I am not alone in my worries. In fact, the Government Accountability Office, the Financial Stability Oversight Council, and the NCUA’s Office of the Inspector General have all recommended that Congress pass legislation to again provide the NCUA with vendor authority.

Furthermore, when the NCUA Board approved the CUSO final rule last October, the range of activities allowed for CUSOs expanded substantially and CUSOs can now originate any loan that a federal credit union may originate. This rule passed without a corresponding expansion of NCUA’s oversight that would ensure consumers are protected in a new world of unregulated, unsupervised lenders and providers.

This means that currently, the NCUA may only examine CUSOs and third-party vendors with their permission, and more often than not, vendors decline these requests. Vendors and CUSOs can also reject NCUA recommendations to implement appropriate corrective actions that mitigate identified risks. In fact, they have rejected our recommendations at times.

Because the NCUA has no supervisory authority over third-party service providers, the banking regulators are not required to share critical information on them that could help our agency protect credit unions from risk. This means that thousands of credit unions, tens of millions of members, and hundreds of billions of dollars in assets are unnecessarily exposed to risk, including ubiquitous cyberattacks.

This stands in stark contrast to the authority of the banking regulators, which means that credit unions are effectively receiving less protection than banks. Said differently, a credit union dollar may be less protected than a bank dollar.

Fortunately, we have recently seen progress in Congress on this issue. The U.S. House of Representatives passed legislation to provide the NCUA the authority to supervise CUSOs and third-party vendors. And, in the Senate, bipartisan legislation has been introduced. It is my hope that this legislation will become law so that the NCUA can develop an effective, risk-focused examination program for CUSOs and vendors before a major problem arises or cyberattack occurs.


In an economic environment fraught with risks, be it interest rate risks, climate related financial risks, liquidity risk, or cybersecurity risk, just to name a few, we need to be more collaborative and nimbler than ever in preparing for an uncertain future.

Working together has proven successful in getting us through the upheaval of a once-in-a-lifetime pandemic. And, it is the same spirit of constructive engagement, common purpose, and unwavering resolve that will ensure the credit union system not only survives, but thrives for generations to come.

Thank you again for inviting me to speak here today. Be safe. Be well. Be kind.

Back over to you, Greg.

Todd M. Harper Cybersecurity Central Liquidity Facility
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