Assessments Less Onerous for CUs Than Banks
CUs likely will pay about one-third less than banks over the next 11 years.
Credit unions can expect to pay about one-third less than banks for assessments over the next 11 years, according to “Comparing Future NCUA and FDIC Assessments,” a new Credit Union National Association (CUNA) white paper.
Thus far, credit unions have paid roughly 20% less in National Credit Union Share Insurance Fund (NCUSIF) assessments than similar-sized banks have paid in Federal Deposit Insurance Corp. (FDIC) assessments.
The significant cost for National Credit Union Administration (NCUA) assessments, both as NCUSIF premiums and as corporate stabilization assessments, is a top concern for credit unions.
The administrators of the two federal deposit insurance funds recently took actions and announced plans that provide a clear picture of their intentions for fund management over the next several years.
NCUA announced a 2010 NCUSIF premium of 12.4 basis points (bp), which along with the earlier 13.4 bp Corporate Stabilization Fund assessment brought the total for the year to 25.8 bp. It and also brought the fund’s equity ratio to its normal operating level of 1.3% of insured shares.
NCUA also announced it plans to deal with the “legacy assets” of five conserved corporates over the coming 11 years, and disclosed estimates of assessment ranges for 2011.
At its October board meeting, FDIC updated the condition of the Bank Insurance Fund (BIF) from minus 30 bp to minus 28 bp of insured deposits, and announced a plan to impose sufficient assessments to eventually raise the fund’s reserve ratio to 2.5%.
Following more than a decade of negligible assessments, both funds have imposed significant levies in the past three years. From 2008 on, FDIC’s assessments have totaled 47 bp of total deposits, which is equivalent to 52 bp on insured deposits.
Over the same period, NCUA’s total assessments have totaled about one-fifth less, at 41 bp of insured shares.
Looking ahead to the next few years, both federal deposit insurance funds will have to impose significant assessments on their insured institutions to restore their funds. For FDIC, BIF must be replenished. For NCUA, the NCUSIF does not need replenishment, but the Corporate Stabilization Fund must be repaid.
From 2011 through 2021—the remaining term of the NCUA Corporate Stabilization Fund—combined NCUA assessments are expected to average about 8 bp of insured shares per year, or a total of 90 bp. Over the same period, FDIC assessments are expected to average about 13 bp of insured deposits for a total of 144 bp, or 50% greater than the NCUA costs.
Both projections of future FDIC and NCUA assessments are estimates based on the agencies’ current expectations about future losses from failed institutions and the performance of the Stabilization Fund’s legacy assets.
If the economic recovery turns out to be very weak, or even slows to a double-dip recession, future assessments at both funds will be greater than these estimates.
Conversely, if the economy surprises on the strong side, current expectations of future losses will turn out to have been excessive, and future assessments at both funds will be less than these estimates.
Next: Recent NCUA actions
Recent NCUA actions
Over the past several months, NCUA took the following actions pertaining to the NCUSIF and the Corporate Stabilization Fund:
- In June, assessed a 2010 Corporate Stabilization Fund assessment of 13.4 bp;
- In September, assessed a 2010 NCUSIF premium of 12.42 bp, bringing the fund’s equity ratio to its normal operating level of 1.3% of insured shares.
The combined assessments for the year are therefore 25.82 bp of insured shares.
In September, NCUA conserved three corporate credit unions (in addition to the two conserved last year) and announced a plan to deal with the “legacy assets” of the five conserved corporates with the following implications:
• Roughly $50 billion of legacy assets will be funded by $35 billion of guaranteed notes, with final maturities ranging to 2021.
• This funding is based on expected ultimate credit losses of around $15 billion on the $50 billion of legacy assets.
Of the $15 billion of estimated losses, $6.9 billion has already been paid ($5.6 billion from extinguished capital at the five conserved corporates and $1.3 billion paid by credit unions in previous assessments this year and last year). That leaves $8.1 billion yet to be paid by credit unions (to be assessed by NCUA) over the remaining term of the Corporate Stabilization Fund.
Because the notes funding the legacy assets will have maturities to 2021, the remaining term of the Corporate Stabilization Fund was extended from five to 11 years.
• In November, announced estimated ranges for 2011 assessments of 0 bp to 10 bp for the NCUSIF premium, and 20 bp to 25 bp for the Corporate Stabilization assessment.
Next: Recent FDIC actions
Recent FDIC actions
At its October Board meeting, the FDIC updated its estimate of the condition of the BIF, and proposed a long-term plan for management of the fund, consistent with changes to FDIC’s statutory authorities in the Dodd-Frank Wall Street Reform Act.
Because of reduced estimates of insurance losses for 2010, FIDC’s reserve ratio has risen from minus 38 bp of insured deposits as of March 2010 to minus 15 bp as of September.
This, coupled with the extension of the time for the fund to reach the designated reserve ratio (DRR), the target level, from 2016 to 2020, allowed the agency to announce the suspension of a 3 bp assessment increase, previously planned for the first quarter of 2011.
The proposed fund management plan takes into account the following statutory changes in the Dodd Frank Act:
- Raises the DRR to 1.35% from 1.15%, and removes the upper limit on the DRR (formerly capped at 1.5%);
- Requires that the fund ratio reach 1.35% by 2020 (from the previous target of 1.15% by 2016);
- Requires that only banks with more than $10 billion in assets be assessed the amount necessary to raise the reserve ratio from 1.15% to 1.35%;
- Eliminates the requirement that FDIC pay dividends when the fund is between 1.35% and 1.5%; and
- Allows, but does not require, the fund to pay dividends when the reserve ratio exceeds 1.5%.
Next: A tale of two funds
A tale of two funds
Both of the federal deposit insurance systems have been significantly damaged during the recent financial crisis. As a result, both will have to impose significant assessments on their insured institutions over the next several years to restore their funds.
BIF’s current reserve ratio stands at a negative 0.15% of insured deposits. By law, the ratio must be restored to at least 1.35% by 2020, a total difference of 1.5% of insured deposits. It’s the restoration of the reserve ratio that will require the significant assessments in the coming several years.
Following a recently announced premium of 12.42 bp, NCUSIF’s current reserve ratio is at 1.29% of insured shares. Since 1.3% is the normal operating level for the fund, premiums over the next few years will only be necessary to maintain rather than to replenish the fund.
However, NCUA will have to collect substantial assessments to pay for the estimated $8.1 billion remaining cost of the Corporate Stabilization Fund.
The primary cost for credit unions insured by NCUA will be to pay for the Corporate Stabilization Fund. Assuming the $8.1 billion expected cost is straight-lined over the 11-year life of the fund, the annual assessment would be $736 million.
The assessment rates for Corporate Stabilization assume an annual assessment of $736 million and that insured shares grow by 5% a year. Future premiums for the NCUSIF are assumed to be quite small as the fund is already at its normal operating level of 1.3%.
As is the case for FDIC, NCUA has already accumulated a substantial reserve for future insurance losses based on information about the current condition of credit unions. However, because credit unions are still under stress, there are likely to be some additional, not-yet-reserved losses at natural-person credit unions in the coming year or two.
Also, low interest rates on Treasury securities will depress the earnings on the Fund’s investments. We estimate the resulting premiums will be around 5 bp in 2011 and 2012.
Projections of future FDIC and NCUA assessments are just that: estimates. They’re based primarily on FDIC’s and NCUA’s current expectations about future losses from failed institutions and the performance of the Stabilization Fund’s legacy assets.
They are probably based on fairly conservative estimates of economic growth—a long, slow economic recovery over the next several years.
If the economic recovery is weak, or even slows to a double-dip recession, future assessments at both funds will be greater.
But if the economy surprises on the strong side, current expectations of future losses will turn out to have been excessive, and future assessments at both funds will be less than anticipated.
BILL HAMPEL is CUNA’s chief economist/senior vice president of research and policy analysis. Contact him at 202-508-6760.