Sailors are well-acquainted with "Iron Mike." The term is used to define the mechanical setting of a fixed course and speed for a vessel. It goes without saying that whatever happens once a ship is on Iron Mike, the vessel stays on the same course and speed absent human intervention.
One might say that the term Iron Mike could also be used to describe the NCUA's setting of the normal operating level for the NCUSIF. The fund's normal operating level has been at 1.3% of insured shares for as long as anyone can remember. Whether in good times or in bad, 1.3% has been the rule of the day. (The law permits the NCUA to set the operating level between 1.2% and 1.5%.)
Of course, there have been times when the industry has benefited from the NCUSIF equity ratio remaining close to the 1.3% operating level. For example, between 1995 and 2000, federally insured credit unions received a dividend each year, with a total refund over the period of about $620 million. We should also acknowledge that prior to enactment of S.896, the Helping Families Save Their Homes Act of 2009, if the NCUSIF equity ratio dipped below 1.2%, the NCUA had to assess federally insured credit unions and restore the equity ratio to its 1.2% statutory floor, not the 1.3% normal operating level.
Given the losses in corporate credit unions and the challenges that natural person credit unions are facing in the current economy, we simply cannot do what we have always done.
While the equity ratio was originally designed to stay at around 1.3%, the rules of the game have changed. Since the enactment of S.896, if the NCUA projects that the NCUSIF equity ratio will fall below 1.2% or if the fund drops below 1.2%, the NCUA must establish a "restoration plan." The law requires the NCUA to restore the fund to 1.2% within eight years (or a longer period under "extraordinary" circumstances).
There are, however, a number of kickers. The first is that if the fund falls below the 1% deposit, there is an immediate impairment on the books of credit unions insured by the fund, and the NCUA must assess credit unions to restore the 1% deposit by the next Jan. 31.
Another kicker is the assessment for corporate stabilization. Some have speculated that the total impact of disposing of legacy assets could be as much as $13 billion. The law, however, provides as long as seven years to pay back the funds borrowed from the Treasury for corporate stabilization. The seven-year payback period can also be extended with the concurrence of the secretary of the Treasury.
As of December 2009, the dollar-weighted average capital ratio for credit unions over $500 million was 9.32% and the dollar-weighted average capital ratio for all federal credit unions was 10.04%. In the past, one might have observed, "This is what the excess capital is for. It will come back in the good times." That, however, sounds to me like what we have always done, and in this economy I am not sure it will give us what we always got. And a fair number of credit unions are already below or approaching the 7% level of being adequately capitalized.
It is time to take a very hard look at the 1.3% normal operating level and consider letting the fund's equity ratio drop below 1.2%, being careful not to let it drop below 1%.
NAFCU wrote to NCUA Chairman Debbie Matz last year addressing this issue and the lack of transparency in the process of setting the normal operating level. We appreciate Matz's response that the NCUA Board plans to revisit the operating level this fall as part of the agency's annual budget process. But credit unions will be better poised for success if we look at this question now. The NCUA provided its best estimate of the assessments for the NCUSIF and corporate stabilization last October. By July, it should have much better estimates. Further, as soon as the NCUA has determined the cost of separating the legacy assets, it should have a reasonable estimate for all corporate stabilization costs. Then, the NCUA will be able to establish a restoration plan of at least seven years.
The NCUA should be encouraged to utilize its discretion by extending the repayments as long as possible. In a letter to Matz last week, NAFCU again called on the NCUA to use the authorized tools it has at its disposal to spread out assessment expenses for both corporate stabilization and the NCUSIF.
This year is without question one of the most challenging our industry has ever faced, with a plethora of new regulations and the prospect of financial services reform. Nevertheless, the most pressing issue facing our industry is the NCUA's handling of corporate stabilization and NCUSIF assessments. The future of our industry is at stake, so we need to get it right; and that will require leadership from the agency, transparency and the utmost cooperation with our industry.
Fred Becker is president/CEO of NAFCU.
He can be reached at 703-522-4770 or firstname.lastname@example.org