A Tale of Two Funds
What will future losses at NCUSIF and FDIC look like?
Future deposit insurance premiums are uncertain—both for institutions insured by the National Credit Union Share Insurance Fund (NCUSIF) and by the Federal Deposit Insurance Corp. (FDIC). Premiums for both will be significantly greater than they’ve been for the past decade. Future premiums will depend on current fund balances at each fund, which account for already realized deposit insurance losses, future insurance losses, and the need to eventually restore the funds to a 1.25% ratio of equity to insured shares or deposits.
NCUSIF’s fund balance was 1.28% and FDIC’s was -0.16% at the end of third-quarter 2009. While this suggests future deposit insurance costs for credit unions will be much lower than for banks, it ignores corporate credit union stabilization costs.
Taking this into account, for now the “placeholder” for future costs related to corporate stabilization is 1% of insured shares—only an estimate. It could be more or less (even significantly so) depending on actual credit losses during the next several years on securities held by corporates. The stronger and faster the economic recovery (in particular, the housing market), the lower the losses, and vice versa. Future losses on these portfolios really are unknown and unknowable.
Assuming the 1% corporate stabilization estimate, NCUSIF’s “net” fund balance would fall to 0.28%—the relatively comparable figure to FDIC’s -0.16%.
This still suggests future deposit insurance costs for credit unions will be less than for FDIC-insured banks, but again it’s misleading. Banks must pay 1.41% of insured deposits (the 0.16% deficit plus 1.25%) to get back to 1.25%. For smaller insured banks, however, the cost would be less. FDIC has a policy of assessing insurance premiums on total domestic deposits—not just on balances below the insurance limit (currently $250,000).
Dividing the required FDIC premium amount by total—rather than insured—deposits yields a premium rate of 0.99% on total deposits. This is very similar to the 0.97% required of credit unions to restore the 1.25% ratio. (Recall under corporate stabilization provisions, credit unions will have up to six years to make these payments.)
So, based on already-booked insurance losses, the two funds are in roughly comparable condition in terms of insured institutions’ obligations to recapitalize them. Assuming comparable future insurance losses, deposit insurance premiums for banks and credit unions will be similar. The crucial question then becomes: How will future insurance losses compare at the two funds? Probably the best indicator is assets in troubled institutions.
In October 2008, shares in troubled credit unions equaled 2.4% of total insured shares. Provisions for insurance losses at NCUSIF over the next 12 months equaled 11 basis points (bp) of insured shares. In October 2009, shares in troubled credit unions had more than doubled to 5.6%. If insurance losses rise in proportion, they’ll add up to 27 bp over the 12 months ending October 2010.
Applying a similar approach to FDIC, assets in troubled banks equaled 1.6% of total deposits in September 2008. Over the next 12 months, provisions for insurance losses at FDIC equaled 78 bp of total deposits. One year later, assets in troubled banks had almost tripled to 4.6% of total deposits. Again, if insurance losses rise in proportion, they’ll add up to 206 bp over the 12 months ending September 2010.
This is admittedly a very crude analysis. It does not yield precise estimates of likely premiums this year. An improving economy means insurance losses likely will be less than 27 bp (NCUSIF) or 206 bp (FDIC). But it suggests insurance losses for FDIC are likely to exceed those at NCUSIF, although probably not by a factor of seven.
Currently, the two funds are in similar condition—implying similar insurance premiums. Looking ahead, and assuming an ultimate corporate stabilization cost of 1%, FDIC premiums likely will increase more than NCUSIF premiums. Future NCUSIF premiums, however, could either rise or fall depending on the eventual costs of the corporate stabilization.