The NCUA's decision to set its normal operating level at 1.39% was "reasonable," the agency's Inspector General said, in a memo late last week.

In the memo, Inspector General James Hagen said his office had been asked by Callahan & Associates to determine the legality of the board's transferring funds from the corporate stabilization fund and increasing the share insurance fund's normal operating level.

However, Hagen said his office determined that it did not have the authority to conduct a legal review.

Instead, the inspector general's office assessed the rationale behind setting the normal operating level at 1.39%. Hagen said in his memo that that agency used the Federal Reserve stress test scenarios to simulate a moderate recession.

"We believe the NCUA's process and basis for recommending the NCUA Board set the NOL at 1.39 percent was reasonable," Hagen concluded.

Critics have said that the normal operating level was too high and should be 1.3%.

In a separate report evaluating the safety and soundness of the credit union system, Hagen's office encouraged the NCUA board to evaluate the normal operating level on an annual basis.

The NCUA board already has announced its intention to do that.

That separate report was issued, as the agency released outside audits that found no problems with the agency's funds. Under law, the inspector general must prepare a report on challenges the agency's share insurance fund may face.

Hagen said that changes in the economy or the performance of legacy assets securing the NCUA Guaranteed Notes program could increase the volatility of the share insurance fund.

Hagen's office identified several other potential challenges the credit union industry must face. They are:

  • Resolving problem credit unions. While the inspector general did not mention the taxicab industry, Hagen said some credit unions with high concentrations of loans where the underlying assets have declined could fail. The agency must take steps to mitigate that risk, the inspector general said.
  • Growing disparities between small and large credit unions. "To try and stop this trend, the NCUA must continue to provide these credit unions with technical assistance and training, new opportunities for growth through reduced regulatory burdens, a flexible examination program for well-run, low-risk credit unions, and enhanced chartering and field-of-membership options" Hagen said.
  • Cybersecurity. "With credit unions and other small financial institutions increasingly targeted, "credit unions must continue to enhance the security of their systems and the NCUA must continue to strengthen the resiliency of the entire credit union system and the agency," the inspector general said.
  • Increasing interest rates. The inspector general also said that rising interest rates could prove challenging to credit unions that hold either high concentrations of long-term assets funded with short-term liabilities or have rate-sensitive deposits and fixed-rate assets.
  • Changing demographics. Credit unions must continue to be cognizant of the large number of people who are retiring, as well as new and diverse populations that are entering the financial system. The inspector general said that the NCUA's creation of the Office of Credit Union Resources and Expansion should allow the agency to better facilitate growth in the industry.
  • Increasing competition and consolidation. The number of credit unions and banks has fallen at a steady rate, the inspector general said. At the same time, institutions are developing new and innovative ways to communicate with consumers. Credit unions that lack the resources to acquire new technology and develop new products face enormous challenges, the inspector general said.
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