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

February 2023
NCUA Chairman Todd M. Harper Statement on the Share Insurance Fund Quarterly Report
Todd M. Harper

NCUA Chairman Todd. M Harper during a meeting of the NCUA Board.

As Prepared for Delivery on February 16, 2023

Thank you, Eugene, to you and your team, for your thorough presentation on the National Credit Union Share Insurance Fund’s performance in 2022. And thank you, Kelly, for being available to answer questions.

Additionally, Eugene, a special thanks to you and everyone in the Office of the Chief Financial Officer for ensuring the NCUA’s four funds each earned another unmodified, or “clean,” audit opinion in 2022. I also want to thank the Office of Inspector General and our independent auditor, KPMG, for their good work throughout this process. Just as we expect the credit unions we regulate and insure to balance their books and ledgers, the NCUA, as a regulator, must also commit to the same level of transparency and accountability for our financial operations.

For Eugene and his team, the annual audit of the NCUA’s funds is their Super Bowl. After all, just like there are four quarters in a football game, they have four funds to manage. And while there are no halftime shows, fireworks, trophies, or giant rings at the end of the audit process, the work and perseverance shown by this team over the last few months is worthy of the same level of recognition. So, thank you again, everyone, for a job very well done.

It’s also worth acknowledging the NCUA’s sustained achievement of unmodified audit opinions for more than 40 years. This record underscores the NCUA’s commitment to sound financial management and the careful stewardship of the resources entrusted to the agency . Additional information on the agency’s financial management and performance in 2022 will be available in the 2022 Annual Report, which we will release mid-March.

During 2022, we experienced high levels of economic uncertainty and a rising interest rate environment. Yet, overall, the credit union system and the Share Insurance Fund performed well during the year. As noted earlier, the rise in interest rates increased the Share Insurance Fund’s income, a welcome departure from the low earnings we have seen during the last decade.

Also, insured share growth moderated during the second half of the year as members drew down some of the savings they had built up during the pandemic. These factors all contributed to an increase in the Share Insurance Fund’s equity ratio, which ended the year at 1.30 percent, up from 1.26 at the end of 2021. That’s positive news.

The Share Insurance Fund’s assets, however, declined due to unrealized losses of approximately $1.5 billion during the year, which was expected. That’s because as interest rates go up, the value of the bonds held in the Share Insurance Fund’s portfolio goes down.

This brings me to my first question about slide 4. Eugene, while the NCUA’s policy is to hold these investments to maturity, what are we doing to account and compensate for the unrealized losses you just reported? Said another way, how are we acting to prevent unrealized losses from becoming realized losses?

Thank you, Eugene, for that informative answer. As a follow-up, I see on this same slide that the net position of capitalization deposits is $16.9 billion. I understand that this number is likely to decline in the future. Why is that? And, what effect will that decline have on the equity ratio?

Thank you, Eugene. Now, let’s look at slide 7. You noted that we’ve begun increasing the dollar amount of overnight notes we hold in portfolio, and the goal is to eventually hold $4 billion in such investments. That’s a prudent decision given the current rise in credit unions with a composite 3, 4, and 5 CAMELS rating. How will the movement to overnight investments ensure the Share Insurance Fund has enough liquidity to get through any future downturn?

That’s good to know. During the last few quarters, we also have seen growing stress within the system because of interest rate and liquidity risk. Additionally, we have begun to identify more instances of internal control problems at credit unions, which can lead to the uncovering of fraud, credit union liquidations, and losses to the Share Insurance Fund.

That is why some element of onsite examinations remains so very critical to identifying safety-and-soundness issues and risks to the Share Insurance Fund. Onsite exams facilitate discussions about how best to address liquidity and interest risk. Onsite exams also allow for better testing of internal controls and closer review of loan documents.

As NCUA examiners return onsite — while continuing to conduct some portions of the exam process virtually — and as interest rates continue to rise, we will likely see more composite CAMELS rating downgrades in all asset classes. So, we should expect the metrics found on slide 12 to get worse in the coming quarters. The NCUA Board will, as such, closely monitor credit union performance in 2023 and take any necessary actions to maintain the stability of the system and ensure the strength of the Share Insurance Fund.

The NCUA, however, could benefit from having more tools in its toolbox before things get worse, such as greater regulatory flexibility when it comes to administering the Central Liquidity Facility. That’s CLF for short.

Despite the best efforts of my fellow Board members, the NCUA staff, and me, Congress failed to make permanent the enhanced authority the CARES Act temporarily provided for the CLF. As a result, 3,322 credit unions — all with less than $250 million in assets — lost access to the CLF when the agent-membership provision expired on December 31. In addition, the expiration of the CARES Act provisions reduced the CLF’s borrowing capacity by nearly $10 billion.

Now is not the time to cut a liquidity lifeline. It is important that the CLF remains strong and able to meet the liquidity needs of the credit union system. Under the leadership of CLF President Anthony Cappetta, we have bolstered and improved the facility’s processes, operations, and structures. We will continue that work. And, the NCUA team will continue educating credit unions about the benefits of joining the CLF.

Yet, the NCUA’s ability to respond to a liquidity event would be greatly enhanced with the restoration of the CLF’s expanded authority. That’s why, we — as an entire Board — sent a joint letter yesterday to Congressional leaders requesting the restoration of the CARES Act provisions for the CLF. I thank Vice Chairman Hauptman and Board Member Hood for their steadfast support of this NCUA legislative priority.

That concludes my remarks. I now recognize Vice Chairman Hauptman.

Todd M. Harper Share Insurance Fund
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