As Prepared for Delivery on September 22, 2022
Thank you, Eugene, and staff.
There is a lot of good news in this update. As was the case in the first quarter, the credit union movement and the Share Insurance Fund (SIF) continue to perform well.
99.8% of insured shares are held in CAMELS 1, 2 and 3 credit unions with 97.4% in CAMELS 1 and 2 credit unions. Losses to the SIF are a fraction of what they were over the past decade, with fraud contributing to two of the three failures in the second quarter.
As expected, the growth in insured shares continued to slow. This has relieved pressure on credit union net worth ratios and the National Credit Union Share Insurance Fund’s equity ratio. The 1.26% equity ratio for the first quarter is good news. And the 1.30% projected equity ratio for December 31 is even better.
However, we are not out of the woods yet. It’s been 40 years since we’ve seen inflation at the levels they are today, and most of us have never experienced it as adults. On a related note, interest-rate-risk and liquidity are significant challenges.
The credit union movement has a variety of tools to manage these challenges including the recently passed derivative rule and updated supervisory guidance on interest rate risk.
Unfortunately, many small credit unions – specifically the 3,600 under $250m in assets – face the prospect of not having an emergency liquidity source. I’m talking about membership in the Central Liquidity Facility (CLF) through the corporate credit union agent sponsorship program.
I mention this because – as most of you know – there is legislation in Congress that extends the ability of those small credit unions to access the Central Liquidity Facility via the corporate credit unions. But of course, there is no guarantee that the legislation passes.
NCUA has been communicating the importance of this provision to our friends on Capitol Hill, and here has been our message:
This provision – one that allowed small credit unions to more easily access emergency liquidity – was included in the CARES Act in 2020 as a way to resolve a problem that grew out of the last financial crisis. Back when mortgage crisis first hit, US Central – the corporates’ corporate – had the capital to pay for CLF membership for all credit unions for emergency liquidity access. Then, the dissolution of US Central left many smaller credit unions without access to the CLF. There isn’t an equivalent entity like US Central today.
In anticipation of another financial crisis, the CARES Act allowed for a corporate to join the CLF for a subset of its members. Following the CARES Act passage, the result was an increase of over $12 billion in additional reserve liquidity as corporates joined the CLF for credit unions under $250 million.
The CLF is the only practical source of emergency liquidity for the over 3,600 credit unions under $250 million. Most of these credit unions are so limited in resources that a direct relationship with the CLF is impractical.
The current agent program provides their corporates the authority to put up the capital and provide support on their behalf. But the program is about to end with the expiration of the CARES Act.
If corporates are not allowed to act as agents for a subset of their member credit unions, these credit unions will lose access to the CLF. We expect a reduction of $9.7 billion in reserve liquidity for the credit union system due to the corporates withdrawing their funds. That’s a $9.7 billion buffer between credit unions and the American taxpayer.
The current interest rate risk environment makes a liquidity event in the short term a possibility. Credit unions under $250 million are especially vulnerable as they are limited in their ability to manage their interest rate risk using derivatives – even in their simplest form as allowed by NCUA.
Without agent membership, 3,600 credit unions face the threat of losing access to emergency liquidity. NCUA will continue to communicate with Congress on this.
So that’s NCUA’s message. I’ll add my two cents on top of it, which is that I completely understand the desire to put all of the emergency COVID provisions behind us. Life, including economic life, must go back to normal.
I appreciate that today’s NCUA board meeting is in-person after 27 consecutive virtual meetings. I also acknowledge that during the COVID crisis, it turned the Central Liquidity Facility wasn’t much utilized…but that’s ONLY because of the immediate flood of money provided by Congress and the Federal Reserve. Perhaps next time will be different, and if so, small credit unions will have a better chance of survival if they can more easily access emergency liquidity.
Thank you, Mr. Chairman. This concludes my remarks, but I do have a question for Eugene.