Fri, Aug 11, 2017
NCUA put out call for comments on Wednesday August 9 during its webinar, which it says are needed by Sept. 5 so the NCUA board has the option to take those comments into account at its September board meeting.
In a webinar hosted by the regulator Wednesday, Larry Fazio, director of NCUA's Office of Examination and Insurance, said there is now the possibility of acceleration of distribution and action to close the fund due to two major developments. The first is NCUA repaying Treasury in full in October 2016, the second is the nearly $4 billion in net legal recoveries – most of the latter related to sales of mortgage-backed securities to corporate credit unions. Those recoveries haven’t been without controversy as they resulted in a legal bill exceeding $1 billion and attracted interest from members of the House Financial Services Committee.
NCUA is proposing closing the Stabilization Fund on Oct. 1, using financial statements as of Sept. 30. Fazio said this would result in a distribution to credit unions in the second quarter of 2018. Individual shares would be determined at a later date.
All assets and liabilities from the Stabilization Fund would be transferred to the National Credit Union Share Insurance Fund. Currently, the Share Insurance Fund is mandated by the Federal Credit Union Act to maintain an equity ratio of not less than 1.2 percent and not more than 1.5 percent. Fazio said because of remaining obligations, including the NGNs, the Share Insurance Fund would have to maintain a higher equity ratio.
Comments from credit unions in response to closure of the fund must be submitted by September 5, 2017 to be assured of consideration. Specifically, the Board is interested in comments whether to:
- Close the Stabilization Fund in 2017, close it at some future date, or wait until it is currently scheduled to close in 2021.
- Set the normal operating level based on the Share Insurance Fund’s ability to withstand a moderate recession or set the level based on the Share Insurance Fund’s ability to withstand a severe recession.
- Base the approach to setting the normal operating level on preventing the equity ratio from declining below 1.20 percent or some other higher minimum level.
Comments can be submitted on the Proposed Rule web page.
The Temporary Corporate Credit Union Stabilization Fund was created in May 2009, to accrue the losses from five failed corporate credit unions and assess insured credit unions for such losses over time. But for the creation of the Stabilization Fund, these losses would have been borne by the National Credit Union Share Insurance Fund, exhausting the Share Insurance Fund’s retained earnings and significantly impairing credit unions’ one percent contributed capital deposit. The Stabilization Fund also is used to account for the costs of the Corporate System Resolution Program and provide short-term and long-term funding to resolve a portfolio of residential mortgage-backed securities, commercial mortgage-backed securities, other asset-backed securities, and corporate bonds, collectively referred to as Legacy Assets. Under the Corporate System Resolution Program, NCUA created a re-securitization program where NCUA issued a series of NCUA Guaranteed Notes that were sold to investors to provide long-term funding for the Legacy Assets.
The Stabilization Fund provided funding for NCUA’s guarantees on the NGNs and for resolution of the liquidated corporate credit union asset management estates through two primary sources: borrowings on NCUA’s $6 billion line of credit with the U.S. Treasury, which was fully repaid in October 2016, and $4.8 billion in Stabilization Fund assessments paid by insured credit unions. The Stabilization Fund is currently scheduled for closure in 2021. However, the Federal Credit Union Act gives the NCUA Board the authority to close it before the scheduled closure.
Closing the Stabilization Fund at this time would result in a distribution of all assets and liabilities to the Share Insurance Fund as required by law. This distribution would increase the Share Insurance Fund’s net position and result in an increase in the equity ratio. However, given the nature of certain assets and liabilities of the Stabilization Fund, the Share Insurance Fund’s assumption of these assets and liabilities will introduce additional risk of volatility to the Share Insurance Fund’s equity ratio.
The Share Insurance Fund equity ratio is the total of credit unions’ one percent contributed capital deposits and retained earnings, less any gain or loss on investments, divided by total insured shares. Per the Federal Credit Union Act, the normal operating level is an equity ratio set by the NCUA Board and may not be less than 1.20 percent and may not be more than 1.50 percent.
NCUA proposes to raise the normal operating level to 1.39 percent to help ensure the Share Insurance Fund has sufficient equity to withstand a moderate recession without the equity ratio falling below 1.20 percent, at which point a premium or fund restoration plan would be required by statute.