Using excess funds from the corporate stabilization account to bolster the share insurance fund may seem painless, but squelch industry discourse.
On Sept. 28, the National Credit Union Administration announced it would close the Temporary Stabilization Fund set up in 2010 to stabilize five failed corporate credit unions. NCUA will merge part of the positive balance of that fund into its share insurance fund. The stated purpose for merging the funds is to bring the SIF up to a normal operating level of 1.39 percent from 1.3 percent. In addition, in 2018, NCUA will distribute $600 million to $800 million to credit unions that contributed to the fund.
With these actions, two questions arise: 1) Should NOL be lifted to a historic high, 19 basis points over the statutory minimal NOL? 2) Should NCUA take a fund that was established for the specific purpose of stabilizing corporate credit unions and merge it with the SIF to achieve the NOL increase?
On the surface, a move to increase NOL to 1.39 percent through the merger of the two funds seems to be the shortest distance between two points. In fact, when asked about the decision to meet the increase in NOL through merging the funds, NCUA Board Chairman J. Mark McWaters said:
“I thought perhaps there’s a different approach because we have this other fund, the stabilization fund, with a lot of money in it. What struck me is maybe we could use those funds.”
Contributing credit unions have already expensed their contribution so any return will be run back through as income and seen like “found money.” So, going this route could be considered a relatively painless way to raise NOL to 1.39 percent. It can also be said that doing things that way is disingenuous.
I believe increasing NOL and winding down the stabilization fund are two separate issues and they should be kept that way. In the chairman’s statement, NCUA lays out why a 19-basis-point increase for NOL is necessary. NCUA might be completely correct in its assessment, but sliding the increase in by merging the funds squelches constructive debate within the community. The chairman says that four basis points of the NOL increase is based on a stress test on the remaining securities in the fund. By all means, then keep that cushion in the fund and return the rest to the contributing credit unions.
Moreover, while the NCUA has the legal right to do this, it continues a bad precedent of government seizing funds just because it happens to have them in hand. The most notorious case of this is the Treasury Department’s “sweeping” profits from Fannie Mae and Freddie Mac into their coffers in a manner not consistent with the 2008 conservator agreement. Since the Treasury started this sweep, it has taken in some $83 billion more than the $187 billion the department put into the government-sponsored enterprises when they were taken into conservatorship.
Additionally, the NCUA chairman’s statement gave another reason for increasing NOL:
Some in the credit union community contend a 1.30 percent normal operating level has historically been sufficient to address risks to the Share Insurance Fund, including during the 2007–2009 financial crisis. This is simply not true. The very existence of the Stabilization Fund and the fact the NCUA borrowed $5.1 billion from the U.S. Treasury to fund resolution obligations, demonstrates that the credit union community was not prepared to handle the impact of the large losses that resulted from the failure of five federally insured corporate credit unions as a result of the 2007–2009 recession.
These corporate credit unions were not some wholly separate and anomalous externality. They were insured credit unions created, funded, and governed by natural-person credit unions. As noted previously, without the Stabilization Fund, all of the equity in the Insurance Fund would have been consumed by these losses.
I think this is a rather myopic view of history. While natural-person credit unions created, funded and governed the corporate credit unions, NCUA was the regulator. Many of the bonds in the corporate credit unions’ portfolios were structures that—even with a high credit rating—were simply unsuitable for these institutions to hold. The entity that had the responsibility to examine the risk and suitability within the corporate credit union’s security portfolios was NCUA. The chairman’s using this as a rebuke to the industry and a further reason for increasing NOL is just plain wrong in my opinion.
The increase in NOL should be done in the daylight while the disposition of the Temporary Stabilization Fund should be dealt with separately. If NCUA Guaranteed Notes are more than adequately covered, then a portion or all of the proceeds should be returned to the credit unions with claims to the fund.
Eric Salzman is senior financial strategist with CUES Supplier member SWBC Investment Services, LLC, San Antonio. Securities offered by SWBC Investment Services, LLC, member SIPC & FINRA. Advisory services offered by SWBC Investment Company, a Registered Investment Advisor.