August 25, 2010
News of the National Credit Union Administration’s decision on the cost of the special assessment for natural person credit union losses is expected at its Sept. 16 meeting. As we wait, I’m frequently asked my opinion on the amount that’s likely to be assessed. I think the answer depends on NCUA’s ability to accurately budget this crisis. As suggested in the December 1997 U.S. Department of the Treasury document, Credit Unions, the faster you resolve the problems, the less expensive to the fund. But the larger the assessment NCUA imposes, the more CUs will become undercapitalized or more severely undercapitalized and in danger of failing.
NCUA needs to maintain the share insurance fund between 1.2 percent and 1.3 percent of insured deposits. The agency can’t make a special assessment that takes the fund over 1.3 percent. And, if the fund falls below 1.2 percent, NCUA must assess CUs to bring it back up within 60 days.
With those parameters, it seems to make sense that the agency will resolve as many of the “worst” troubled credit unions it can handle just before the assessments are announced. This will allow NCUA to spend what is needed for resolution, add that to your tab, and charge what is needed to get back to 1.3 percent within the 60-day window. That strategy leaves more funds to deal with additional problems until next year’s assessment.
Of course NCUA may not require 1.3 percent of insured shares. It could choose to reduce the amount to as low as 1.2 percent, but doing so increases the chances of having to impose additional assessments during the year and gives the agency less flexibility.
At this late date and after all of that happy news, you may wonder why I would recommend you bother to try to determine what the assessment will be. But unless you can reasonably estimate the next and future years’ assessments, how will your credit union make meaningful strategic decisions about the future and still protect your net worth ratio? Can you afford to lose six more years of progress toward your goals by continuing to “wait and see”? Conversely, are you comfortable moving forward with a strategic plan calling for a large capital expenditure based on someone else’s estimate of 10 basis points?
When the regulator gives a range as wide as it did this year, it’s not very helpful for business planning and strategic decision making. You need to be able to hone in a little closer to truly understand your risk. The real problem isn’t what the assessment will be this year, but what will it be next year, and the year after that. While no one knows what’s coming, if you do your homework and make a determination that you believe is reasonable, you can use the comparison of your result to the announced assessment as an opportunity to learn how to be even more accurate next year.
Start by refreshing your memory and review absolutely everything you can find on NCUA’s Web site back at least to 2008 when NCUA first started to take actions to deal with the problem. Make sure to review both corporate and natural person credit union information, as prior to this summer the assessments were combined and generally discussed together. Pay special attention to signals in NCUA board members’ and officials’ speeches about the agency’s direction and intent. Be sure not to skip the Office of the Inspector General reports, financial statements, Letters to Credit Unions with enclosures, and all board materials. Read materials by others as well, but be careful to verify information you are relying on. I’ve heard some very inaccurate information from some surprising sources.
Next set your assumptions and plan your methodology. Some of the assumptions I have made in my own analysis include 1) problems will be dealt with by NCUA in a timely manner to avoid increasing the ultimate cost; 2) the agency will stay within the total range announced earlier, which leaves 10 to 26.6 basis points; 3) NCUA will maintain the fund at 1.3 percent; 4) losses for large credit union failures will be incurred within 60 days preceding the assessment; and 5) insured shares as of the most recent quarter data will be used as a basis for cost, as growth will be covered by the semi-annual adjustments.
While there are many methodologies for approaching the problem, a logical way is to look at the assets of troubled credit unions, make your estimate of the failure rate by looking at the aggregate call data, and then use Federal Deposit Insurance Corp. data to estimate the cost to the share insurance fund. I use FDIC data because this agency discloses the estimated cost to the fund with each failure, including the details of any guarantees or loss share agreements that it makes with the acquiring bank. And while NCUA has been successful in the past with relatively low dollars of assistance for credit unions acquiring troubled credit unions, that trend is unlikely to continue as the problems go deeper.
When you have your total, divide it by industry insured shares, then multiply by 10,000 to get the result in basis points. Depending on whether you estimated the entire industry losses at once or you only estimated one year, you may need to divide by the number of years you expect the NCUA to take to deal with the natural person credit union problems. If your answer is beyond the top of the agency’s range, I would probably feel comfortable using the range maximum. But then I’d start to worry about next year. Because credit unions will be doing this all over again.
Janice Hollar, CCE, is a senior vice president with RP® Financial, LC. She can be reached at 703.647.6554
