By Chip Filson
The GAO released a report in October analyzing the causes of credit union failures from 2010-2020. The news stories and report lead with two facts: 145 credit unions caused $1.55 billion in losses to the NCUSIF during these 11 years.
The full report took 16 months to complete and contains appendices full of math correlations and sophisticated looking analysis.
However, it omits the most important fact about these losses, which is the NCUSIF’s 1.30 Normal Operating Level (NOL) is 93 times larger than the rate of insured losses for this period. That is a critical actuarial finding.
The GAO failed to put its analysis in any context or perspective. Any loss is too much. All credit unions operate in a competitive market. As noted by Ed Callahan when chair of NCUA discussing deregulation, “Some credit unions will do better than others.”
The most important issue is the financial impact of losses on the NCUSIF and credit unions. Using the GAO’s $1.55 billion total, this results in a loss rate on insured savings in this 11-year period of 1.4 basis points.
The loss trend is also declining as noted in the study. Of this total, the report (page 13) says $831.7 million was from the failure of three taxi medallion credit unions in 2018. That means the 142 remaining credit unions lost $718 million for a loss rate of only .65 of one basis point.
In the context of a $20-billion insurance fund with total capital equal to 1.3% of insured savings, the fund is 200 times larger than the insured losses if the disruptive event of the taxi medallions is not included. If counted, the fund as noted, is 93 times larger than the 11-year insured loss rate.
Reasons for Failures
Figure 7 on page 19 is a table labeled: Top Material Loss Review Causes or Contributors to Failure by Number of Times Mentioned.
This is the list of the six causes from most to less frequently cited:
- Credit Union Board or Committee Oversight
- Failure by NCUA Examiners
- Weak or missing NCUA Guidance
- Fraud
- Management integrity
- Lack of timely and aggressive NCUA action
All of these six areas are why there is an examination of every insured credit union. These “causes of failure” should be covered in every exam.
Room for Improvement
The report does not cite economic circumstances or external disruptive events, as in the taxi medallion credit unions, as reasons for losses. The report began after the Great Recession with losses in 2010 when the economic recovery was well underway.
What the report makes clear is that NCUA’s exam program has much room for improvement.
At its recent November board meeting, the agency’s CFO commented that the positive NCUSIF AME recoveries from prior loss estimates has continued into November. So, the net loss reserving expense for 2021 is, in effect, negative. This means the two most recent NCUSIF loss ratios cited above should be even lower when this year’s results are added to this study’s total.
Chip Filson is a co-founder of Callahan & Associates and well known within credit unions as an author, frequent speaker, and consultant. Filson also previously served as president of the Central Liquidity Facility (CLF) and Director of the Office of Programs at NCUA. For more info: www.chipfilson.com.