NCUA Vice Chairman Kyle S. Hauptman at the NCUA's headquarters in Alexandria, Virginia.
As of Prepared for Delivery on December 16, 2021
Thank you, Mr. Chairman and thank you, David and Russell, for your presentation.
Under the Federal Credit Union Act, the normal operating level:
- Can be set from 1.20 to 1.50 percent
- If the equity ratio of the Share Insurance Fund lands between 1.20 and 1.30 percent, the NCUA Board has the discretion to assess a premium to bring the equity ratio back to 1.30 percent. The premium is limited to an amount that restores the equity ratio to 1.30 and no more.
- A distribution to credit unions is required when the share insurance fund equity ratio exceeds the normal operating level. Our current normal operating level is set at 1.38. Today’s policy recommendation will bring it to 1.33 percent.
I say all this because of the significant concern I’ve heard from the industry regarding a potential Share Insurance Fund premium. I understand that concern but earlier this year made the judgment call to urge patience and caution. As we had anticipated, a number of metrics improved over the past 12 months. Credit unions were right. The dip in the equity ratio was partly an “artificial” dip due to COVID-related stimulus efforts and the fact that, for a while there, Americans were not (and couldn’t) spend money like they normally do.
Given the economic uncertainty of this past year, it was prudent to seek comment from the public. I, along with my fellow board members, encouraged stakeholders to submit input and to include any other relevant issues they believe the Board should consider.
I sincerely appreciate the work staff did to evaluate the normal operating level. We must continue to improve our assessment of the appropriate normal operating level – quantitively, using a standardized approach of relevant data and qualitatively, based on experience and judgment. The normal operating level should not be set arbitrarily, but rather carefully considered with relevant and accurate data.
The money in the Share Insurance Fund belongs to the credit unions. A higher normal operating level results in NCUA keeping more of it than necessary, and that means less money for credit unions and their members. Since money at credit unions normally earns a higher return than the Treasury bonds in the Share Insurance Fund. So, every dollar in the Share Insurance Fund means the credit union system, as a whole, gets poorer. We have to balance that fact against NCUA’s responsibilities as an insurer. I should note that one benefit of low-earning U.S. Treasuries is that they tend to rise in value in times of economic distress, a nice feature for an insurer.
Finally, regardless of whether someone likes the fact that we are lowering the fund’s normal operating level, we should acknowledge that it shouldn’t make too much difference anytime soon since we aren’t projecting the equity ratio to get above 1.33 in the near future. This new normal operating level only matters if the equity ratio is between 1.34 and 1.37 percent, and that scenario is, for now, something of a high-class problem. Mr. Chairman, this concludes my remarks. I do have a couple of questions.
Question: I’ve been told by a number of professionals in the credit union system that based on past performance, 1.30 percent is where the Board should set the normal operating level. It’s hard to argue that 1.30 percent hasn’t served us well in the past. How do we reconcile the past performance of the of the Share Insurance Fund being sufficient at 1.3 percent with any higher number?
Question: I understand that the normal operating level-setting exercise employs a hypothetical “moderate recession,” but can you give us a sense for what this means in terms of real numbers. For example, what type of unemployment rate is assumed in the scenario.
Thank you, Mr. Chairman. That concludes my remarks.