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NCUA Chairman Todd M. Harper Statement on the Share Insurance Fund

September 2022
NCUA Chairman Todd M. Harper Statement on the Share Insurance Fund

As Prepared for Delivery on September 22, 2022

Thank you, Eugene, for the update on the performance of the National Credit Union Share Insurance Fund in the second quarter of this year and for the overview of the Fund’s projected equity ratio. And, thanks to your team for their hard work in preparing for this briefing.

Today’s briefing is filled with good news. The Share Insurance Fund continued to perform well in the second quarter, as it had in the first quarter. Although the equity ratio sits below an ideal level, it remains relatively stable at 1.26 percent as of June 30, which is a slight improvement over the 1.25 percent forecast provided last quarter.

Earnings were also slightly higher than projected, while actual losses were lower than the model. And, staff has forecast a projected equity ratio for 1.30 percent at the end of this year, which would be 4 basis points higher than the end of last year. That is very good news.

Additionally, this quarter is the first Share Insurance Fund presentation to reflect the CAMELS data which now includes the “S” for Sensitivity to Market Risk. While there was a small increase in CAMELS 3 credit unions this quarter, the data continues to show solid performance overall.

The improved health of the Share Insurance Fund validates the NCUA Board’s wisdom in delaying the imposition of preemptive premiums on the industry earlier in the pandemic when we teetered dangerously close to the 1.20 percent statutory minimum for developing a plan to recapitalize the Share Insurance Fund. Nevertheless, while we project a 1.30 percent equity ratio by the end of the year, we are not out of the woods just yet.

In fact, we are already seeing liquidity issues in the industry. What is more, some of the credit unions now getting caught in a liquidity vice of rapidly rising interest rates have $1 billion or more in assets. Those billion-dollar-plus credit unions pose the risk of greater losses to the Share Insurance Fund. That fact is a flashing caution sign that we should all heed, and it indicates that we should continue to proceed carefully when making any decision about the Share Insurance Fund.

Time will also tell whether this rise in the Share Insurance Fund equity ratio represents durable, sustained growth for this much watched metric or whether the increase is merely a momentary mirage. We will know more in the coming weeks once our experts calculate the projected normal operating level.

That brings me to my first question. Eugene, how do inflation and rising interest rates affect both the Share Insurance Fund and its equity ratio?

Thank you for those insights. Looking now at slide 2, you reported that investment income was $68.6 million in the second quarter. That figure is roughly $10 million higher than the same period last year. Is this increase attributable to an increase in the portfolio yield, the overall size of the investment portfolio, or both?

Thank you. Your response demonstrates the continued soundness of the NCUA’s practices when it comes to managing the Share Insurance Fund’s assets. Looking ahead, if we continue to earn more interest income, does that decrease the likelihood of a future premium?

Let’s now look at slide 10. The actual equity ratio as of June 30, 2022, was 1.26 percent. That’s the same as it was in December 2021. The graph here suggests this is the first time since at least 2017 that the equity ratio did not decline between December and June. Why is there a change in the typical pattern?

Next, moving to the projected equity ratio on slide 11, staff has forecast the equity ratio to be 1.30 percent for year-end 2022, a 4-basis point improvement over the June actual ratio. What are the significant factors behind that projection?

Let me follow up on that response with one last question. You stated that the projection is for insured shares to decline between June and December. I can’t recall that happening before. Is this situation unique? What are the implications for the equity ratio of a decline in insured shares?

Thank you for your responses and for your thorough briefing today. That concludes my remarks. I now recognize Vice Chairman Hauptman.

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