No Plan for NCUSIF Exits Hits Sour Note
Because conversions to private insurance and mutual savings banks are “relatively rare,” the NCUA isn’t developing a contingency plan for helping credit unions that stay in the system deal with any additional costs from more departures, according to a letter from NCUA General Counsel Michael McKenna to NASCUS President/CEO Mary Martha Fortney.
He wrote that all five credit unions with conversion applications (three to mutual savings banks and two to private insurance) will pay this year’s assessment to the Temporary Corporate Credit Union Stabilization Fund, and some will have to pay next year’s assessment. The fund was set up by Congress in 2009 to pay for the rescue of several troubled corporate credit unions.
He added that while the agency doesn’t need a contingency plan, it is “closely monitoring the situation and can take quick action, if necessary.”
McKenna, who was responding to a letter that Fortney sent to NCUA Chairman Debbie Matz last month, wrote that the agency’s monthly management report will from now on list the amount of insured shares held by each credit union with a charter or insurance conversion application and the percentage of total insured shares represented by each converting credit union.
State Employees of North Carolina Credit Union President/CEO Jim Blaine said it is irresponsible that the agency isn’t developing a plan because it is a matter of fairness that all credit unions be required to pay their full share of the costs of rescuing the corporates, even if they leave the NCUSIF.
“They ate the meal, and they shouldn’t be allowed to leave without paying their full share of the bill,” he said.
Blaine, whose $23 billion credit union is based in Raleigh, N.C., also noted that during the 1990s, thrift institutions that wanted to leave the Savings Association Insurance Fund and join the Bank Insurance Fund were charged an exit fee in order to pay for some of the billions of dollars of costs incurred from savings and loan failures.
At the time, there was a 19.5 basis point difference between the premiums levied by the two insurance funds. The exit fee should be a model for what the NCUA does, with the help of Congress, to ensure that those credit unions that remain in the system don’t have to pay more of the rescue costs, Blaine said.
However, former NCUA Board Member Geoff Bacino said he disagrees with the premise of Blaine’s analysis because it ignores the essence of the risks associated with the cooperative model and the way insurance works.
“Those who didn’t use the corporates are still having to pay for the rescue, and they have an even better argument that they shouldn’t have to pay for them. But that is part of the costs of insurance. Even if you are a safe driver and follow all the rules, your [insurance] rates can go up because of the actions of others,” Bacino noted.
Credit union attorney Steven Bisker said it is possible that the NCUA could require credit unions that leave the insurance fund to place money in an escrow account that could be used to pay for future-year costs of rescuing the corporate credit unions.
NAFCU President/CEO Fred Becker said the NCUA should be doing a better job of “planning and thinking ahead and considering all the possible scenarios to minimize the exposure of credit unions. When the stabilization fund was established by Congress, the purpose was to not let anyone avoid assessments.”
CUNA Chief Economist Bill Hampel said there will be less incentive to convert to a bank or to private insurance because the NCUA has said the costs of the rescue will be smaller than originally estimated and because the FDIC isn’t a great bargain.
“The tendency during a difficult economic period is to think that the grass is greener, but upon closer scrutiny, you may well find that the grass is quite brown there,” he said.
According to the NCUA, three credit unions with a total of $3 billion in insured shares are in some stage of the process of converting to mutual savings banks. But the agency said only one of those credit unions, the $188 million Har-Co Maryland FCU in Bel Air, Md., is far enough in the application process to release the name.
Two credit unions, with total insured shares of $124.7 million, have applied to convert to private deposit insurance. Those credit unions are School Employees Lorain County CU in Elyria, Ohio, and Pacifica-Coastside CU of Pacifica, Calif.
Marcus Schaefer, president/CEO of the $1.1 billion Winston-Salem, N.C.-based Truliant FCU, praised the NCUA for beefing up regulations that make it harder for credit unions to convert to banks.
Those regulations, which were enacted last year, mandate that if a credit union is considering a bank conversion, the board and its executives must break down the costs of converting and distribute it to members.
They must also provide “complete and accurate" information about possible changes in service, such as branch closings or access to a shared branching network.
McKenna noted that insured shares decreased by $695.9 million from conversions since the stabilization fund was signed into law in May 2009, but the total insured shared increased more than $69 billion during that period.
In response to questions asked by Fortney, McKenna said if the agency made a single assessment for the remainder of the fund’s expenses, it would reduce overall net worth by 56 basis points and cause 4,500 insured credit unions to have negative earnings.
He also said the agency predicts that 250 credit unions would see their net worth drop below 7% and five more credit unions would fail and cost the NCUSIF up to $300 million.
In August, the agency announced a 25-basis point assessment for this year’s portion of the repayment of the Treasury Department loan to pay for the corporate credit union rescue. Currently, the agency has set up a system to spread out the payments over the next seven years.