NCUA Chairman Todd M. Harper at a meeting of the NCUA Board.
As Prepared for Delivery on February 15, 2024
Thank you to both you, Eugene, and to your team for that insightful presentation on the National Credit Union Share Insurance Fund’s performance in 2023. Additionally, I want to thank everyone in the Office of the Chief Financial Officer for, once again, ensuring the NCUA’s four funds each earned an unmodified, or “clean,” audit opinion in 2023. I also want to acknowledge the Office of Inspector General and the NCUA’s independent auditor, KPMG, for their diligent efforts during the audit process.
It’s noteworthy that the NCUA has achieved unmodified audit opinions for more than 40 years. This consistency underscores the agency’s commitment to sound financial management and prudent stewardship of the resources entrusted to us. The NCUA remains committed to maintaining a high level of transparency and accountability for our financial operations, just as we expect federally insured credit unions to achieve with their financial records.
Overall, the Share Insurance Fund’s performance in the fourth quarter of 2023 was strong. As noted earlier, assets increased to more than $21.4 billion. That’s a rise of more than $1 billion for the year. And, we experienced solid investment income growth. In fact, because of higher interest rates, we earned one-third of the year’s income in just one quarter of the year.
Moreover, the equity ratio now stands at 1.30 percent, higher than the NCUA’s initial year-end projection of 1.27 percent. This increase results from declining share and deposit growth within the system, continuing low levels of insurance losses, and rising interest income on the Share Insurance Fund’s investment portfolio.
While we should recognize those positive things, today’s presentation also illustrates why we cannot become complacent in the supervision of federally insured credit unions. In recent quarters, the NCUA has seen growing signs of financial strain on credit union balance sheets and consumer financial stress. And, we continue to see that financial stress manifest itself in the number of credit unions and the percentage of assets held by composite CAMELS code 3, 4, and 5 credit unions.
A particular concern for me is the sizable increase in assets in composite CAMELS code 3 institutions, which as shown in the sand graph on slide 12, now stands at 7.81 percent of the system’s total assets. It’s been about a decade since we last saw this proportion of insured shares at risk. So, we must remain attentive as we navigate these new economic realities.
What’s even more concerning for me is the growth rate of these changes, especially among complex credit unions with more than $500 million in assets. Slide 13 shows that assets in the composite CAMELS code 3 group for credit unions of all sizes increased to $160.2 billion, just over a 20 percent increase for the quarter. But, what really caught my attention is that total shares in CAMELS code 3 complex credit unions have more than tripled during the last year, growing from $32 billion at the end of 2022 to $102.3 billion at the end of 2023.
This brings me to my first question. Eugene, why do we see modest increases in assets for composite CAMELS code 4 and 5 institutions and dramatic increases in assets for composite CAMELS code 3 credit unions? And, what’s driving the downgrades in the CAMELS ratings?
Thank you, Eugene, for that explanation. With a large and growing proportion of the credit union system’s insured shares and assets residing in complex credit unions, we must all stay focused. That’s more than just the work of NCUA’s examiners. Credit union executives, administrators, and boards of directors must especially remain diligent in managing the identified safety-and-soundness and consumer financial protection risks within their institutions. In short, today’s marketplace requires active — not passive — management by all.
Fortunately, the Share Insurance Fund is well-positioned to handle any contingency. Over the last few quarters, the NCUA has moved more of the investment portfolio into overnight investments, which as shown on slide 7, now exceeds $5 billion. Investment plans now call for moving one-half of remaining notes once they mature into overnights and the other half further out on the investment ladder to protect the Share Insurance Fund for the future.
Eugene, would you explain how these actions will simultaneously ensure the Share Insurance Fund has enough liquidity to see us through any potential downturn in the near term and secure its continued strength and stability in the long term?
Thank you for that explanation. As a quick follow up, has the Share Insurance Fund ever had this much liquidity?
Thank you, Eugene. It’s vital that the NCUA Board balance the Share Insurance Fund’s long- and short-term needs. While the Share Insurance Fund has not experienced an increase in actual losses compared to projected losses, we must remain cautious given the current economic uncertainty and the growing number of assets in composite CAMELS code 3, 4, and 5 institutions. Therefore, I believe it’s prudent for now to keep the Share Insurance Fund’s normal operating level at 1.33 percent and to eventually reevaluate the methodology for calculating that metric to account for other factors beyond just credit risk.
After all, protecting the Share Insurance Fund against losses is job number one for the NCUA Board. As such, the Board will continue to closely monitor credit union and Share Insurance Fund performance. And, engaging in a public discussion to review the methodology for setting the normal operating level is a prudent and transparent thing to undertake.
Before closing, I cannot emphasize enough the importance of liquidity planning for financial institutions of all sizes, especially following the Federal Reserve Board’s decision to close the Bank Term Funding Program as scheduled on March 11. This program helped to stabilize the banking and financial system after the collapse of Silicon Valley, Signature, and First Republic banks last year.
With the sunset of this temporary program, credit unions will need to ensure they have ready sources of liquidity available should they need it. In fact, access to the NCUA’s Central Liquidity Facility and the Federal Reserve’s Discount Window should be part of participating credit unions’ broader liquidity risk management plans for a variety of contingencies, not just during times of crisis.
Also, credit unions should not be concerned about using the Central Liquidity Facility for fear of negative consequences as part of an examination. As a reminder, the more members and capital stock the Central Liquidity Facility has, the better it can serve the liquidity needs of credit unions. In fact, when the credit union system navigated treacherous waters in the wake of the corporate credit union crisis more than 15 years ago, it was the Central Liquidity Facility that helped to maintain the strength of the Share Insurance Fund.
Given the importance of such liquidity, the NCUA Board has unanimously and repeatedly called on Congress to allow corporate credit unions to purchase capital stock in the Central Liquidity Facility to help smaller credit unions access liquidity. We will continue to engage with Congress on this legislative priority and consider — going forward — other actions to ensure sufficient liquidity at individual credit unions and within the credit union system.
That concludes my remarks. I now recognize Vice Chairman Hauptman.