The NCUA’s equity ratio stood at 1.22% at the end of June — approaching the 1.20% level at which a formal restoration plan would be required, NCUA officials told the agency board Thursday.
The ratio has dropped 13 basis points since the end of 2019, largely because of a huge increase in insured deposits because of the coronavirus crisis, Eugene Schied, the agency’s CFO, said during the board’s monthly meeting. The agency’s Normal Operating Level is 1.38%. Federal law allows the NCUA to assess a premium on credit unions if the equity ratio dips below 1.30%. The law requires the agency to adopt a plan to increase the equity ratio once it dips below 1.20%.
The pandemic and stay-at-home orders, decreases in consumer spending and other government actions has led to an “unprecedented growth” in insured deposits, Vicki Nahrwold, supervisory risk management officer in the agency’s Office of Examination and Insurance, told the board.
The Federal Credit Union Act defines the equity ratio as “(A) the amount of Fund capitalization, including insured credit unions’ 1% capitalization deposits and the retained earnings balance of the Fund (net of direct liabilities of the Fund and contingent liabilities for which no provision for losses has been made) to (B) the aggregate amount of the insured shares in all insured credit unions.”
The NCUA’s equity ratio is evaluated twice a year, Schied said.
The board did not move to adopt a restoration plan, which could have included a premium to be paid by federal credit unions.
Nonetheless, board members said the agency must closely monitor the equity ratio.
Vigilance is needed,” NCUA Chairman Rodney Hood said. He said the FDIC faces similar problems, adding that the agency has adopted a restoration plan.
Nahrwold said increasing the equity ratio by 5 basis points would cost credit unions $500 for each $1 million in insured shares.
Board member Todd Harper said that charging credit unions premiums during the economic downturn is “less than optimal.” He said the NCUA board should work with Congress to change the operations of the Share Insurance Fund.
He said operating in a counter-cyclical fashion would allow the agency to build up reserves during strong economic times to cover losses during poor economic times.
Board member J. Mark McWatters said he is “apprehensive” about the downward trend in the equity ratio. McWatters continues to serve on the NCUA board because the Senate has not yet confirmed his replacement, Kyle Hauptman.
“Regrettably, it’s not alarmist to foresee the Equity Ratio dipping below 1.20% in 2021, with far reaching statutory consequences, including the possibility of future credit union premium assessments,” he said.
He said the agency acted prudently when it set its Normal Operating Level at 1.39%, adding that it provided a “safety net” for the agency.
During Thursday’s meeting, the board also adopted a final rule that defers the requirement to obtain a written appraisal or estimate of market value of up to 120 days following the closing of a transaction for certain residential and commercial property. The board adopted the proposal as an interim final rule earlier this year.
The rule expires at the end of the year.
The board also was told that implementation of the agency’s Modern Examination and Risk Identification Tool has been slowed by the pandemic. The board also approved an order that grants an exemption from Customer Identification Program requirements for loans made to customers for purchases of property and casualty insurance policies.
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