ALEXANDRIA, Va. — Transparency and a common tongue were the themes of the NCUA's most recent board meeting as the agency issued a draft of its next strategic plan written purposefully in plain language and revealed the process it uses to set the NCUSIF's normal operating level.

The normal operating level is the equity ratio the fund must maintain in order to insure the deposits of credit union members at federally insured institutions. By law and the agency's regulations, the level cannot fall to below 1.20% and cannot be allowed to rise above 1.5% of the insured shares. If the level were to fall below 1.20%, NCUA would have to levy a premium on federally insured credit unions, and above 1.50%, the agency would have to return money the insured CUs in the form of a dividend.

But NCUA has a lot of freedom to act within those two statutorily set parameters and, historically, has not revealed very much about how it sets the level from year to year. The agency sought to change that by developing, approving and publishing its approach to setting the level so that all credit unions would be able to see it and, in theory, work out on their own the relative likelihood of the agency levying a premium or distributing a dividend.

In recent years, the agency has set the level at 1.30% and NCUA did not change that number this year. But this year the agency also adopted and shared the policy it would use to evaluate the fund and see if the level merited a premium or allowed a dividend.

In presenting the new policy to the board, NCUA's Deputy Director of Insurance Larry Fazio, Director of Risk Management John Kutchey, and Risk Analysis Officer Steve Farrar, explained that the agency's policy focused on both quantitative and qualitative measures.

The quantitative measurement included stress tests on four areas, level of shares to be insured, the operating expenses to the fund, the insurance losses to the fund from failed CUs and changes to the income the fund earns from its investments. The stress tests were made assuming a two-year window since the agency has seen that business cycles generally do not match calendar years. NCUA also used a ten-year moving average to obtain the maximum expected levels of change within each of these parameters in order to both take historical data into context and still keep the calculation relevant to current conditions.

For instance, Kutchey explained that looking at an average of losses which included years before the agency put Prompt Corrective Action into place would not make sense since PCA has notably cut losses to the fund.

In making the move, the Board expressed optimism that the increased transparency would help credit unions better understand and even predict whether a premium or dividend might be in their future for a given year. But credit union economists on hand for the meeting expressed doubt whether this would be the case.

“Whenever an agency steps out to do things in a more transparent way, that is a good thing,” said Tun Wai, NAFCU's Chief Economist. “But in looking over the document here today, there is really not enough information for a credit union to be able to really know what the agency is going to do.”

Wai said more details would be needed and took note that it would be difficult for credit unions to know how the agency is handling different aspects of its qualitative analysis.

Bill Hampel, CUNA's chief economist, also scoffed at the notion that individual credit unions would want to invest the time and effort to follow the details of how the agency sets the operating level, but added that this was what credit unions have trade associations to do. But like Wai, he also praised the agency's effort to be more transparent about its operations.

The Normal Operating Level discussion came on the heels of the board's discussing and approving a draft of its next strategic plan. Covering the years 2009 — 14, the plan is notable for being written in much plainer and cleaner language than previous versions have been, an attempt which James Patrick, NCUA's Director of Planning and Vanessa del Toro, a planning analyst, said would help both the agency staff and overall public better understand what the agency seeks to do.

For example, the first sentence in the plan's Mission Statement for the agency reads: “The National Credit Union Administration is the independent federal agency that charters and supervises federal credit unions and, through the National Credit Union Share Insurance Fund, insures a majority of member deposits held in the nation's credit unions.”

Patrick and del Toro emphasized that the cleaner language was meant to both help the NCUA keep in step with federal management goals emphasized by the Office Of Management and Budget and to help it implement the plan across all of its nationwide staff.

In its last action, the Board approved some changes to the insurance fund's investment policy which were designed to help it maintain available cash flow in case of need. The new policy says the fund will only invest in bonds or securities which have a maximum maturity of 10 years; can have no more than 25% of the fund in securities with maturities of longer than five years.

The meeting ended on a bittersweet note as the Board said goodbye to Dennis Winans, NCUA's Chief Financial Officer, who is completing almost 29 years with the agency and will soon retire. The Board thanked Winans for his service, perseverance, sense of humor and thoroughness. After the meeting, executives with credit unions, credit union leagues and associations approached to thank him as well.

–dmorrison@cutimes.com

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NCUA Takes Two More Steps Toward Transparency And Plain Language

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