Oddly enough, the controversial plan to merge the Temporary Corporate Credit Union Stabilization Fund with the share insurance fund was inspired not by a desire to return dollars back to credit unions ahead of schedule but rather as a way to avoid levying new assessments.
Indeed, the real goal was to prop up the National Credit Union Share Insurance Fund, according to NCUA Chairman J. Mark McWatters during a special press briefing where he and fellow Board Member Rick Metsger dug into the history and thinking behind the plan that was approved last Thursday.
A little more than a year ago, disturbed by the prospect of having to levy an assessment on credit unions to bolster the industry’s sagging share insurance fund, McWatters asked agency officials whether money from a fund created in 2009 to clean up the collapse of a number of corporate credit unions could be used — “borrowed” was how he termed it — to replenish the insurance fund.
“We’re faced with a situation where our equity ratio is declining,” McWatters, who was appointed chairman by President Trump in June, explained in a session with reporters Thursday. “It was going to lead to a premium for the credit union community. The credit union community would be assessed by a board vote and it would have to write a check.”
Ultimately, staff shot the loan plan down, but the story didn’t end there. NCUA continued to explore options for using the Temporary Corporate Credit Union Stabilization Fund, which holds about $2 billion currently, to shore up the share insurance fund. Eventually, after a year spent analyzing and researching the issue, a workable plan was found — namely the merger of the two funds that the NCUA Board approved Thursday.
“I thought perhaps there’s a different approach because we have this other fund, the stabilization fund, with a lot of money in it,” McWatters recalled. “What struck me is maybe we could use those funds…I thought maybe we could borrow some funds but that did not work out so well.
“Then came the idea of merging the funds together, negating the check-writing from the credit unions but then turning around and refunding some of the funds that they were forced to put into the stabilization fund during the financial crisis.”
NCUA officials realized the plan would be controversial within the industry. Credit unions, after all, contributed nearly $4 billion to the stabilization fund between 2009 and 2013. While the merger plan provides for a distribution to institutions of between $600 million and $800 million in 2018, NCUA would use a roughly equivalent sum to boost the share insurance fund’s equity ratio to 1.39%. That figure would become the fund’s normal operating level going forward, an increase from 1.30% where the level had sat since 2007.
The stabilization fund was not scheduled to sunset until 2021, when the last of the assets once held by the corporate credit unions are liquidated. According to NCUA, cash from those assets and possible legal recoveries may allow the agency to refund an additional $1.1 billion in the next few years.
Although banks have been increasingly vocal in NCUA’s rulemaking process, filing hundreds of comment letters objecting to the agency’s overhaul of both member business lending and field of membership regulations, they were silent this time around, as none of the 663 letters NCUA received about the funds merger came from a bank source.
The merger of the two funds is likely to have real-world implications for banks, nonetheless.
Industry-wide, credit unions’ net worth has been declining since 2014, when it peaked at 10.96%. Now, injection of as much as $800 million early next year, as well as the prospect of an additional $1 billion shortly thereafter is likely to reverse the trend, making credit unions that much more competitive.
For McWatters, the funds merger proved appealing because it addressed two key issues; buttressing the share insurance fund at a time of economic uncertainty, while providing a rebate — albeit partial — to credit unions.
“In its current condition, the insurance fund’s equity ratio is ill-equipped to withstand even a relatively mild downturn in the economy,” McWatters said. “We simply cannot ignore a weakening share insurance fund and the possibility of a recession in the near future.”
“Some credit unions said no, we would prefer to have the money back,” he continued “As much as I would like to declare a large dividend, that’s not what the objective criteria says.”
Still, for credit unions, the nine-basis-point jump in the normal operating level came as a shock.
In the weeks prior to Thursday’s vote, hundreds wrote comment letters opposing the plan, arguing the increase was too steep, with a few labeling it a “cash grab.”
In one-on-one discussions with credit union executives, both McWatters and board member Rick Metsger said they were able invariably to get their point across.
“When you explain it to them, my experience the last couple of months has been, they get it,” Metsger said.
But a spokesperson with the National Association of Federally-Insured Credit Unions, which opposed the plan, said Friday that the trade group had received “numerous messages from credit union CEOs who thanked it for the stance it took."
The association’s position was driven by its members, who objected to the increased normal operating level and the partial refund, the spokesperson added.
With Thursday’s vote approving the merger of the funds, the issue now is what happens to the normal operating level. Credit unions have made it clear they want it reduced as soon as possible.
“The refund seems largely non-controversial. The controversial issue is what do you set this normal operating level at,” McWatters admitted. He and Metsger pledged to re-evaluate it regularly.
“Prudence would dictate that future boards assess this… It will be as long as I’m around.,” McWatters said. “My term goes to August 2, 2019 so, with even a modest holdover, I can say I have two years left on the board.”
“Staff does look at it on a regular basis,” Metsger added. “The board has the ability to do that at any time. Speaking from my perspective as well, that is the intent, to re-evaluate it as the window of uncertainty becomes a window of certainty.”