A Tale of Two Insurance Funds: NCUSIF vs. FDIC

Costs will be 60% greater to replenish bank fund than for NCUSIF.

October 14, 2010
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Front-loading assessments

NCUA has suggested there may be a need to slightly front-load the stabilization assessment next year for liquidity reasons. CUNA has encouraged NCUA to meet any short-term cash management needs with borrowing rather than higher assessments.

However, if a stabilization assessment greater than 9.2 bp is necessary for some reason next year, a strong case could then be made for letting the NCUSIF ratio float around 1.25% rather than 1.3%. That would require a 5 bp smaller premium, still meaning a likely combined cost in the range of 15 to 20 bp next year.

Also, if a greater than 9.2 bp assessment is charged next year, future assessments would be lower by the amount of any excess charged next year.

The estimates of future assessments of 1% of current insured shares for credit unions and 1.6% of current insured deposits for banks are driven less by actual losses already taken and more by estimates of future expected losses.

The FDIC fund ratio of negative 0.28% is based both on actual bank failure losses taken thus far and on an estimate of future losses from bank failures. Those future losses are estimated on the basis of the current number and condition of troubled banks.

For NCUSIF, the 1.3% ratio is based on similarly calculated and estimated losses at natural person credit unions. The corporate stabilization estimate (the $8.1 billion) is based on estimates of the future performance of the legacy assets, which will depend on the future course of the economic and housing recoveries—most of the corporates’ troubled assets are private label mortgage-backed securities.

If the economic recovery is stronger than most people expect, losses at both FDIC and NCUSIF will shrink, and lower assessments will be required. However, if we experience a severe double-dip recession, the losses will increase and even greater assessments will be required at both funds.

There’s a good chance the remaining corporate stabilization costs will end up being less than $8.1 billion. NCUA’s previous estimates of the cost of the corporate stabilization, made last year, were based on total losses on the legacy assets of somewhere between $10.5 billion and $12 billion, not the $15 billion used for the legacy asset securitization.

Press reports suggest that the expected performance of the sorts of securities that make up the legacy assets have, if anything, improved slightly over the last year. At the very least, it would be very unusual for them to have deteriorated significantly.

Indeed, the total Other Than Temporary Impairment (OTTI) charges taken against the legacy assets at the five conserved corporates as of June amounted to $11.7 billion. Because OTTI is subject to a ratchet effect (if estimated losses rise they must be expensed, if estimates fall, they can’t be recovered until the security repays), accumulated OTTI charges, if anything, overstate actual likely losses.

These factors all suggest that the $15 billion estimate is likely based on very conservative (pessimistic) assumptions. This was likely necessary to secure Treasury’s approval of the deal.

This is not to say that credit unions can count on a total cost of less than $8.1 billion. It could conceivably be even more than that.

However, there’ a significant probability that the ultimate remaining cost will be closer to $5 billion than $8 billion. We won’t know this until late in the remaining 11-year life of the stabilization program.

If the losses are lower, the assessments will end sooner than 2021.

For both federal deposit insurance funds, we can hope for an improvement in the economy so costs are reduced. However, in any event, per dollar of insured deposits, the amount that FDIC insured banks will have to pay to restore their fund over the next several years is significantly greater than what credit unions will have to pay to NCUA.

BILL HAMPEL is CUNA’s chief economist. Contact him at 202-508-6760.

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