Tuesday, January 10, 2017

Why the NCUA Can't Pay Its Bills Going Forward... Without Annual Assessments On Credit Unions.

No way out! Face the music...
... and the assessments!

The NCUA has   cornered a rat ! 

And, that rat  be you!

It's taken a few years of "indiligent" [and, of course, unaccountable, untransparent and perhaps incompetent] planning and management, but the NCUA staff has finally done it - worked us all into a corner!

On November 17, 2016, the NCUA senior staff announced they had run out of ideas - and money! - to an "awestruck" NCUA Board... and that a $300 to $600 million assessment on credit union members would be necessary in 2017 to maintain the targeted 1.30% equity ratio of the NCUSIF. [here's the link] 

What the senior staff evidently didn't tell the NCUA Board - and certainly hasn't mentioned to credit unions - is that additional annual assessments will be required for the next several years - unless NCUA changes "its thinking" - and we all know how "robustly" unlikely that is of happening!

Let me show the simple math on how you know NCUA is getting ready "to move your cheese" on a regular annual basis...

Here are the components of our equation:

#1) The approved 2017 NCUA annual budget: @$300 million.

#2) The % of the $300 million annual NCUA operating budget drawn from (called the overhead transfer rate - the "OTR") the earnings of the NCUSIF: @ 2/3rds or $200 million.

#3) The balance in the NCUSIF: @ $13 billion.

#4) The NCUA staff projected yield on the NCUSIF over the next 3 years: < 2.00%.

#5) Current level of insured shares: @ $1 trillion.

Alright, ready?!? We're going to do the simple math - OK? 

Step 1: How much will the approximate earnings be on the NCUSIF next year? Easy! The fund balance ($13 bil.) X @2.00% = $260 million. 

Step 2:  After the OTR draw down of $200 million (#2 above) to fund the operating budget (#1 above) the balance of earnings left to increase the NCUSIF will be @ $60 million in 2017 ( $260 million in earnings (Step 1) minus $200 million (the OTR drawn down #2 above) = $60 million). And, according to NCUA senior staff the earnings on the NCUSIF will be around 2% in 2018/2019  [because of that brilliant 10-year investment ladder strategy - remember!?]There are simply not enough investment earnings left - after the NCUSIF earnings have been drained to maintain the NCUA budget - to maintain that 1.30% target ratio. 

Take a look at how this works out in 2017. Credit unions grew by about 8% in 2016 and will be sending in additional NCUSIF deposits (your 1% NCUSIF deposit) shortly. Here's an approximate example of how all that adds up - based on NCUA staff projections:

a)  Current balance in NCUSIF:            $13 billion
b)  Add'l CU deposits for 8% growth:    $ 800 million
($1 tril X 8% = $80 bil x 1%)
c) "Excess" investment earnings:           $ 60 million    
d:)  Total - NCUSIF in 2017:                $13.86 billion                                                    

So, the new NCUSIF equity ratio drops from 1.30% ($13bil/$1 trill.) to 1.28% ($13.86/$1.080 trill.)... and gets worse in 2018, and yep... even worse in 2019...


Should I
"FOIA" this?

Don't you wish the NCUA staff would level with you about what is coming?

...but you know what that would require...



Anonymous said...

and they said there wouldn't be math!

Anonymous said...

Jim – Stated another way, and correct me if I am wrong, the NCUSIF “tax rate” that credit union members pay for share growth is 1.00%. However, the NCUSIF equity ratio needs to be maintained at 1.30%.

The difference between the 1.00% tax rate and the 1.30% equity requirement is supposed to be “paid for” by investing the NCUSIF dollars and making a small return. However, the NCUA is stealing from the fund, and the investments are earning less than anticipated, due to the incompetence of following a 10 year investment strategy that does not work in the rates down cycle we have been experiencing for 8 consecutive years now.

So really, the effective tax rate on deposit growth needs to be about 1.20% to make up for the difference. Last time I checked, that is a 20% increase on the tax for share growth.
Sounds like a policy that is an advocate for the regulator, not the member (and a rat eating the credit union cheese).

FYI: 10 Year Treasury at 2.37% today, trending back downward.

tony costanzo said...

Jim - Might we suggest the NCUA subcontract the management of the NCUSIF to American Share Insurance (ASI). ASI imposed fewer assessments among its credit unions than the NCUA during the most recent financial crisis. Adding insult to injury the ASI equity ratio TRUMPS the NCUA ratio - BIGLY.
Between 2009 and 2013 ASI total ASI premiums were 61.5 bps of shares as compared to the total 83.32 bps paid to the NCUA by federally insured credit unions during this period. ASI assessed no special premiums in 2014. The ASI equity ratio is 1.68% - a ratio far superior to that of the NCUSIF. Dues paying, card carrying CUNA & NAFCU credit unions could realize and recognize a real member benefit if the trades were successful on this score. Don't hold your breath.