CUNA and the Chip Filson-led Co-Ops for Change may be singing off different song sheets, but the chorus is the same: The corporate assessment era should end.
CUNA President/CEO Bill Cheney made the statement on July 26, the day after the NCUA’s monthly board meeting in which the federal insurer revealed the 2013 corporate stabilization assessment of 8 basis points.
“We strongly urge NCUA to consider, in the future, minimizing or even eliminating future corporate stabilization fund assessments, based on today’s action by the NCUA Board,” he said. “Our analysis indicates that this year’s assessment amount of about $700 million could well be sufficient to cover the remaining losses on the legacy assets acquired from the five failed corporate credit unions.”
The improving economy and housing market have decreased loss estimates on corporate legacy assets, said CUNA Chief Economist Bill Hampel during a July 29 press call.
“As of last December, and after this assessment is collected, the remaining losses will range from $900 million to $3.2 billion,” Hampel said. “Given the fact that losses are continuing to decrease, the bottom end is getting close to zero.”
Hampel said CUNA met with NCUA officials and told them that unless the housing market takes a significant hit before next summer, there is no need for future assessments.
“We think that even if there are going to be more losses, they are likely to be quite small and there is no need to rush to collect them next year,” he said. “NCUA could pause the assessment program for a few years and collect more, if necessary, a few years down the road.”
NCUA Public Affairs Specialist John Fairbanks said several factors bear on the regulator’s decision to set the annual assessment. He added that the NCUA will conduct its usual legacy assets review announce the estimated range for the 2014 stabilization fund assessment this November.
Any over collection of assessments now would be rebated to credit unions in the future, Hampel said, but that would mess up credit union income statements by making return on average assets artificially low when the assessment was collected, and in turn, artificially boost ROAA numbers after a rebate.
The NCUA’s line of credit with the U.S. Treasury is also an issue, Hampel said, and the regulator would rather pay that back sooner rather than later.
After collecting $700.9 million in October and applying approximately $650 million toward the credit line, the NCUA will have $4.075 billion outstanding, leaving a little less than $2 billion to act as a liquidity cushion for both the corporate stabilization fund and the share insurance fund. That’s enough to meet any systemic liquidity needs, Cheney said.
Hampel did acknowledge the NCUA has been under pressure to come up with a liquidity backstop after U.S. Central was liquidated in October 2012 and $1.845 billion in CLF stock owned by the corporate was converted to cash to repay depositors. The NCUA issued a proposed rule in July 2012 that would require credit unions with more than $100 million in assets to establish emergency liquidity relationships with one of two providers, the CLF or the Federal Reserve’s discount window. However, the final rule has not yet been approved.
NAFCU General Counsel Carrie Hunt said upon first glance her trade would like to see a little more cushion than $2 billion, but needs to study the issue further. Although historically the credit union industry had never needed more than $2 billion before the corporate crisis, and new regulations on corporate investments have reduced loss risk, Hunt said the corporate crisis showed history isn’t an end-all predictor of the future.
And, Hunt downplayed the drama of requests to significantly lower or eliminate future assessments, saying the NCUA all along had projected a significant drop in assessments for 2014.
“This is nothing new,” she said.
Back in 2011 when the NCUA was considering allowing credit unions to prepay assessments, Hunt said the regulator projected that assessments would be high in 2011 through 2013, and then take a significant dip to 5 or 6 basis points for 2014. The housing market has improved since 2011, which may have further reduced the 2014 projection to just 1 or 2 basis points, she said.
“We’ve been asking all along for assessments to be as low as possible for our members,” she said. “But if the economy has another hiccup, or there’s another issue with NGN performance and the NCUA does need some additional cash, it could put them in a tough position.”
Ultimately, NAFCU has said the NCUA should be precise and careful when it sets assessment rates, and that position has not changed, she said.
“What we wouldn’t want is for NCUA to postpone assessments a year and double them the next,” Hunt said. “We’re not supportive of a shell game, either. We support NCUA being fully transparent with what they’re doing, and we think they have been. The NCUA hasn’t been hiding the ball.”
Filson has taken a different approach, saying in a July 25 release that the NGNs are already overcapitalized by 149%, to the tune of $10 billion in excess coverage.
Co-Ops for Change’s crowd-sourced analysis of the five corporates’ spreadsheets shows more than $5 billion in unused loss write downs, he said. Interest collected on legacy assets adds up to nearly $50 million per year, Filson said, which means the earnings will help offset projected losses.
When the audited financial statements of the conserved corporates were issued in December 2009, the auditors said OTTI reserves should be approximately 27% of troubled assets, he said. But when those same assets were refinanced outside the system, market funding required collateralization of 56%—more than double that percentage—even with an NCUA guarantee.