WASHINGTON—NCUA is asking Congress for the authority to charge risk-based NCUSIF premiums.
The request appears in a footnote of NCUA Director of Examination and Insurance Larry Fazio’s written testimony delivered to the Senate Banking, Housing and Urban Affairs Committee. Earlier this week Fazio testified before the committee during a hearing on regulatory relief for community banks and credit unions.
In footnote 29 on page 14 of the testimony, NCUA states: “NCUA has two other legislative priorities . . . The second priority would permit NCUA to charge risk-based premiums for the Share Insurance Fund much like the Federal Deposit Insurance Corporation charges for the Deposit Insurance Fund. Risk-based premiums would lessen the funding burden on small credit unions, which generally pose less risk to the Share Insurance Fund.”
Unlike the FDIC deposit fund, credit unions keep 1% of their deposits on deposit with the NCUSIF, which is mandated by Congress to maintain a reserve ratio of 1.30%.
Keith Leggett, former senior vice president and senior economist at the American Bankers Association, termed the Fazio entry “interesting,” saying in its his view that what the footnote means is the agency is seeking to use a “tiered” system that would have well-managed, less-risky credit unions--which tend to be smaller--pay less than riskier CUs, which tend to be larger.
“I look at this as giving a nod to small credit unions, being supportive of them,” said Leggett. “I think it makes sense. You want to go to a risk-based premium system because you want riskier institutions to pay more than those that pose less risk.”
Leggett noted that while many in the industry are critical of NCUA, “This is a positive development. What you want to do is get away from the flat-rate assessment that exists.”
The reason, he said, is that the flat-rate assessment essentially means less-risky, well-managed credit unions subsidize riskier shops.
As to why the request was placed in a footnote, Leggett surmised that asking for a possible premium increase on some CUs would not be well-received during a meeting on reducing regulatory burden.
Peter Duffy, managing director at Sandler O'Neill, New York, called a risk-based premium system “abundantly more fair,” predicting that CUs might see this system before the end of the year.
“But the timing of this is less important than what it is saying, and what it is saying is we need to ask those credit unions that are more risky to pay more insurance than those less risky.”
Duffy called the development a “continuation of the standardization” of the way financials are supervised.
“What you hope for is a system by which the added insurance is based on is substantially similar or the same as the banks’ system,” said Duffy. “And the reason for that is the same as wanting the risk-based capital rule to be substantially similar to banks’. You can’t have something as materially important to credit unions as capital and insurance handled in a way that renders them less competitive in the marketplace.”
When asked the objective of the request, NCUA spokesperson John Fairbanks explained, "NCUA is proposing a change in the Federal Credit Union Act allowing the agency to charge risk-based premiums for the Share Insurance Fund, much like FDIC charges for the Deposit Insurance Fund. This change would bring us more closely in alignment with FDIC and would reduce costs for small credit unions, as they generally pose less risk to the Share Insurance Fund."
Asked how this new system might work and when it might be implemented, Fairbanks replied, "All we’re doing right now is proposing the change. Congress would need to pass a law, and then the (NCUA) board would have to approve a rule that would implement the framework. At this point, that process is well down the road. There isn’t a timeline at present."