NCUA Chairman Todd. M. Harper ask a question during an NCUA Board meeting that was held at the NCUA's Central Office in Alexandria, Virginia.
As Prepared for Delivery on November 17, 2022
Thank you, Eugene, for the update on the performance of the National Credit Union Share Insurance Fund in the third quarter of this year. And, thank you to all of your team for their hard work in preparing this briefing.
Before turning to the state of the Share Insurance Fund, I would also like to recognize your team’s good work on receiving an unmodified or clean opinion in the Share Insurance Fund’s quarterly audit. This success demonstrates the NCUA’s ongoing commitment to sound financial management and the careful stewardship of the Share Insurance Fund’s resources. Thank you, everyone, for a job well done.
Overall, the Share Insurance Fund continues to perform well. The changes in the interest-rate environment during the third quarter increased the income and earnings of the Share Insurance Fund. That is one positive benefit of rising interest rates. In recent years, the low-interest-rate environment has reduced the Share Insurance Fund’s ability to generate revenue to offset its expenses and the system’s growth in insured shares.
Eugene, that point brings me to my first set of questions. On slide 2, you reported that investment income was $73.6 million in the third quarter of 2022. That figure is roughly $5 million higher than last quarter and approximately $14 million higher than one year ago. Is this increase attributable to rising interest income alone, or is it explained by the reduction in expenses related to liquidations or the remaining corporate legacy assets? Also, how do rising interest rates affect the Share Insurance Fund’s financial position?
Thank you for that explanation, Eugene. It helps stakeholders understand how changes in interest rates contribute to the Share Insurance Fund’s financial health and the equity ratio’s strength.
Unfortunately, the Share Insurance Fund report for this quarter also shows another side of rising interest rates with an increase in the number of credit unions with a composite CAMELS code 3, 4, or 5 rating. Additionally, several credit unions have experienced liquidity issues recently, including some with more than $1 billion in assets. And, with ongoing inflationary pressures and continued interest rate increases likely, the potential for headwinds slowing the economy and increasing stress on households and financial institutions continues to grow. As such, the NCUA and the Share Insurance Fund must remain ready to act.
That brings me to my next set of questions, Eugene. On slide 4 of your presentation, there was an increase in the Share Insurance Fund’s reserve balance. Please explain why there was an increase and the analysis used. Also, how does the current reserve balance of $183.2 million compare to periods before the COVID-19 pandemic?
Thank you for that insight. Let me turn to slide 5, which shows the number of credit union failures that incurred a loss to the Share Insurance Fund. In 2022, four credit union failures during the first three quarters caused approximately $7 million in losses. Fraud was a contributing factor in three of these cases. As examiners return onsite, they have found an increase in recordkeeping deficiencies, problems with internal controls, and instances of fraud. Do you expect fraud to be the primary factor in future credit union failures and Share Insurance Fund losses?
Thank you for that answer. Your response illustrates why the NCUA must continue to conduct onsite examinations, in at least some form. Even though we learned during the pandemic that many more of our examination procedures can be completed offsite, it is important that examiners go into credit unions to examine documents, ask questions, interact with staff, and review internal controls. That will require some increase in travel costs, especially when compared to the last two years when the pandemic curtailed on-site examinations. So, as the NCUA Board considers the 2023–2024 budget, we must ensure that our efforts to be penny-wise in examinations don’t ultimately result in being pound-foolish when it comes to the strength and stability of the Share Insurance Fund.
As noted in your presentation, Eugene, the Share Insurance Fund also continues to see unrealized losses because rising interest rates lower the value of Treasury bonds held on the books. These unrealized losses, fortunately, do not impact the equity ratio, just as unrealized gains do not increase the equity ratio. We, however, should consider these unrealized losses when structuring the Share Insurance Fund’s investment ladder, especially if we determine that we need more liquidity in the near term given current conditions and don’t want to sell investments at a loss.
Earlier this year, the NCUA adjusted its investment strategy, moving from a 7-year ladder to a 10-year ladder in response to the changing interest-rate environment. Eugene, slide 6 of your presentation summarizes the Share Insurance Fund’s investment portfolio. While we are now working to build out a 10-year ladder, we must also ensure that we have sufficient liquidity to handle any sudden losses. Such overnight reserves would ensure the Share Insurance Fund is prepared to handle an emergency that may arise in the current, uncertain economic environment. So, if we decided to increase the Share Insurance Fund’s immediately available liquidity by investing more in overnights, how would that affect the portfolio’s average yield?
Thank you, Eugene. With inflationary pressures and increasing interest rates, a credit union’s ability to manage interest rate and liquidity risk will remain a crucial factor in its performance for the remainder of this year and 2023. Simultaneously, the NCUA Board will continue to monitor trends and developments in the economy, financial markets, and credit unions. If any issues arise, the Board will also be ready to take action to protect credit union members and the Share Insurance Fund.
Moreover, if credit unions encounter liquidity issues, it would be important for the NCUA Board to have the strongest possible Central Liquidity Facility. The CLF is a critical source of emergency liquidity for the credit union system and the Share Insurance Fund. As such, during two hearings this week, I asked Congress to make the Central Liquidity Facility’s agent-membership authority permanent.
Three out of every four credit unions currently have access to the Central Liquidity Facility through the agent membership of their corporate credit union. Unfortunately, such access will cease at the end of the year, unless Congress acts to extend the agent-member provisions. Given the stress we are already seeing in financial institutions, the credit union system, financial markets, and economy, now is the time to ensure that the system has the strongest possible liquidity shock absorber. I know that we, as a Board, stand united in that opinion.
That concludes my remarks. I now recognize Vice Chairman Hauptman.