Credit unions stand to receive a windfall of as much as $800 million next year if the National Credit Union Administration is able to go forward with a plan to merge its corporate credit union stabilization fund into its share insurance fund.

NCUA officials have gone on record repeatedly stating credit unions wouldn’t begin seeing any compensation for the $4.8 billion they were assessed following the failure of five large corporate credit unions until after June 2021. Now, though, with the crisis long since passed and the stabilization fund maintaining a positive balance approaching $1.9 billion, officials said there is little reason for its continued existence.

Better yet, folding it into the $13.2 billion share insurance fund will provide much-needed wherewithal to withstand a potential economic downturn. Under the plan unveiled Thursday at the regular meeting of the NCUA Board, the stabilization fund would be closed at the end of September. Then, after what Chief Financial Officer Rendell Jones called “full-scope” audits of both funds, the path will be clear to disburse between $600 million and $800 million to credit unions sometime in 2018.

NCUA’s currently two-member board gave the plan conditional approval and released it for public comment. In order to meet the Sept. 30 target for merging the two funds, comments must be received by Sept. 5. NCUA plans to host a webinar Aug. 9 to answer questions about the proposal.

Strengthening the share insurance fund would be achieved by increasing its normal operating level to 1.39% from the current 1.3%. Though the move reduces the amount available for a payout, officials said it would boost reserves to a level that would enable the insurance fund to withstand a moderate recession without having to tap insured credit unions for additional assessments.
By law, NCUA cannot let the share insurance fund dip below 1.2% of insured deposits.

NCUA held out the prospect of nearly $1 billion in additional disbursements, but it didn’t provide a timetable beyond the initial payment next year.

Both of the industry’s leading trade associations, the Credit Union National Association and the National Association of Federally-Insured Credit Unions issued statements Thursday afternoon welcoming the prospect of an early disbursement. They were less enthusiastic about the proposed increase in the share insurance fund’s normal operating level, however.

NCUA Chairman J. Mark McWatters and Board Member Rick Metsger deliberate at the agency's July board meeting Thursday.

In NAFCU’s press release, CEO Dan Berger called the increase in the operating level “unacceptable.”
“NAFCU will strongly urge the agency to avoid such a dramatic move,” Berger added. “The money credit unions pay to the NCUA comes from its members, and it should be returned to the fullest extent possible.”

CUNA CEO Jim Nussle admitted to harboring “some initial concerns” about the higher operating level, but pledged to “work closely with the agency on this matter.

For his part, Chairman J. Mark McWatters said Thursday’s proposal strikes the right balance, returning a substantial amount of cash to credit unions while bolstering the share insurance fund.

“I recognize the importance of returning surplus funds to insured credit unions,” he said Thursday. “At the same time, the NCUA must guard the share insurance fund against reasonably foreseeable future adverse economic conditions and maintain a countercyclical stance to avoid charging credit unions a premium if another economic downturn occurs,” McWatters said Thursday.

NCUA created the stabilization fund in 2009, following the failure of five large corporate credit unions to avoid saddling the share insurance fund, which protects member deposits in federally insured credit unions, with massive clean-up costs. The stabilization fund was financed with $4.8 billion in assessments paid by individual credit unions and a $1.5 billion loan from the U.S. Treasury.
NCUA finished paying off its debt to the Treasury in October, thanks in large part to its success in clawing back more than $4 billion from investment banks that sold toxic mortgage-backed securities to the failed corporate credit unions.

In other actions, the board approved a proposed rule expanding the definition of “in danger of insolvency” to give regulators more time to deal with troubled institutions. The current rule requires credit unions to fall into one of three net-worth categories over a period of time to be categorized as in danger of insolvency. The proposed rule lengthens the timeframes for two of those net-worth triggers by six months, allowing for earlier intervention.

The proposal also creates a fourth category targeting institutions that have received assistance under section 208 of the Federal Credit Union Act, which permits the NCUA Board to make loans, purchase assets or establish deposit accounts at struggling credit unions.