Assessments Determined by CUs, Not NCUA
Almost every day, credit union representatives ask me to keep the NCUA's assessments low.
The fact is the amount required for each assessment is not determined by the NCUA. It is determined by credit unions. If credit union losses are lower, credit union assessments will be lower.
The NCUA's calculation of assessments is based on the anticipated amount we need to reserve against losses. This is carefully derived from information gathered from Call Reports and exams.
By law, the NCUA must levy assessments based on which types of credit unions cause losses. Losses in corporate credit unions must be paid through assessments from the Corporate Stabilization Fund. This year's assessment from the Corporate Stabilization Fund will amount to 13.4 basis points.
Losses in consumer credit unions must be paid through assessments from the NCUSIF. This year's assessment from the insurance fund will hinge on two huge factors that are controlled by credit unions, not by NCUA: actual losses and anticipated losses.
Actual losses in failed credit unions includes losses covered by the insurance fund when credit unions must close due to assisted mergers, purchase and assumptions, or liquidations.
The assessment also must cover anticipated losses, we consider capital depletion. Many credit unions, while still well-capitalized, will be draining capital this year due to negative earnings.
We examine trends in delinquencies and loan losses. In many parts of the nation, these losses continue to increase.
We also weigh trends in financial and managerial strength, as measured by CAMEL ratings.
Unfortunately, the anticipated losses for 2010 are increasing significantly. Currently budgeted at $750 million, this is more than six times the actual losses in all of 2009.
And there is reason for concern as we look forward. Nearly 2,100 credit unions now have CAMEL codes 3, 4 and 5. This threat is up more than 30% since the beginning of the Great Recession in December 2007, when there were only 1,600 troubled credit unions.
Troubled credit unions are not only growing in number; they are also growing in size. With more than $150 billion now deposited in troubled credit unions, their risk to the insurance fund is more than three times greater than it was three years ago.
If current loss trends continue, the fund's equity ratio will fall below the normal operating minimum of 1.2% by the end of this summer. This will require the NCUA to submit a restoration plan to Congress. The restoration plan will need to project assessments to restore the fund to its normal operating range of between 1.2% and 1.3%.
Later this year, the NCUA board may consider maintaining the equity ratio a few basis points below 1.2%. This could slightly reduce assessments for a limited time.
But it would be irresponsible to reduce the fund's safety margin much lower than a few basis points below 1.2%. Given the magnitude of losses that are now likely, it would not be practical to try to manage the ratio too close to the statutory minimum of 1.0%.
If losses ever cause the equity ratio to slip below 1.0%, the law requires an immediate assessment and a write-down of credit unions' deposit in the fund. The stakes are too high to lose sight of our obligation to maintain a reasonable margin of safety.
This is why the NCUA is working so diligently to strengthen supervision in areas that are causing credit union losses. We have implemented a red flag tracking system to detect the highest risks. Our examiners are looking to partner with credit unions to mitigate those risks. When examiners and credit unions work together, they can fix problems earlier and prevent costly failures.
However, when a credit union fails to follow their examiner's document of resolution or letter of understanding and agreement, the NCUA must quickly accelerate administrative action to minimize any losses.
I assure you: We do not take these decisions lightly. Before the NCUA approves any cease and desist order, conservatorship, assisted merger, or purchase and assumption, we thoroughly review the data and trends. Then we consider all possible options. In every case, our goal is to maintain quality services to members at the lowest cost to the fund.
It is our intent to protect the system so that credit unions will be there when members are looking for a safe place to save and an affordable place to borrow. But regulators can only do so much. Before credit unions can secure their members' financial future, they must secure their own.
Ultimately, the assessment amounts depend on credit unions' own performance. This is a direct result of decisions made by credit union executives and board members.
It is worth repeating: If credit union losses are lower, credit union assessments will be lower.
So instead of asking the NCUA to keep assessments low, ask your colleagues at other credit unions to operate safely-by managing risks effectively and by restraining costs reasonably.
Just as you are counting on your colleagues, they are counting on you. By leveraging the collective strength of the cooperative system, you can prevent further losses and minimize future assessments.
Debbie Matz is chairman of the NCUA. She can be reached at 703-518-6309 or firstname.lastname@example.org