NCUA Chairman Todd M. Harper during a meeting of the NCUA Board.
As Prepared for Delivery on November 16, 2023
Thank you, Eugene, for your report on the performance of the National Credit Union Share Insurance Fund in the third quarter of 2023. And, I know that much effort occurs behind the scenes to prepare for today’s briefing, so thank you to your entire team for their hard work.
The Share Insurance Fund’s performance in the third quarter of 2023 mirrors the industry’s financial performance over the last year. Like the credit union system, the Share Insurance Fund is performing generally well overall. But, there are some flashing cautionary lights that we should all heed and act upon.
For several months, the NCUA has reported signs of growing liquidity, interest rate, and credit risks within the credit union system. In today’s report, we see that stress firsthand, especially in large, complex credit unions with $500 million or more in assets. In fact, as shown on slide nine, the number of large, complex credit unions with a composite CAMELS code 3 rating increased by 9 credit unions to a total of 51 credit unions in the third quarter of 2023.
Assets in the CAMELS code 3 group for credit unions of all sizes also increased to $131.7 billion as shown in the bottom right corner of slide nine. That’s nearly 45 percent higher than the previous quarter’s results.
This sudden rise may be startling for some, but it should have been expected. After all, the continued high levels of interest rate risk have increased credit union liquidity risks, contributed to asset quality deterioration and capital erosion, and placed pressure on earnings.
What is most concerning for me, however, is the rapid rise in total assets for composite CAMELS code 3 billion-dollar-plus credit unions. If not addressed quickly by credit union management, these problems could escalate into composite CAMELS code 4 and 5 ratings and even failures. And, it’s the billion-dollar-plus credit unions that pose the greatest risks to the Share Insurance Fund.
The rising risks within the credit union system also demonstrate why the NCUA Board must ensure the agency’s 2024 budget has sufficient resources to examine, supervise, and mitigate these growing risks. Some may not like the size of the increase proposed in the staff draft budget, but it is our job to protect credit union members and the system.
Other issues — including the reinstatement of federal student loan repayments, rising costs for property and casualty insurance, and consumers drawing down the last of their pandemic-era savings — will also affect already strained household finances going forward. And, those household-level issues could eventually roll onto a credit union’s books as delinquencies and charge-offs. So, the NCUA, credit unions, and the public should be prepared for further impact on the asset distribution of the system’s composite CAMELS ratings. It will get worse before it gets better.
That brings me to my first question. Eugene, on slide eight, we see a 275-basis point increase in the percentage of insured shares held by composite CAMELS code 3 credit unions since the end of 2022. This brisk increase concerns me. How rapid is the growth of insured shares in CAMELS code 3 credit unions compared to what we have experienced in prior business cycles?
Thank you, Eugene. The NCUA will continue to monitor credit union performance and mitigate risks through the examination process, offsite monitoring, and tailored supervision. The NCUA Board will also closely watch credit union and Share Insurance Fund performance in the quarters ahead and act to protect the system as needed.
Additionally — and I cannot emphasize this enough — credit union executives, supervisors, and boards of directors must remain diligent in managing the potential risks on their balance sheets and when monitoring economic conditions and the interest rate environment. Today’s economic environment requires active — not passive — management by all.
Additionally, the NCUA must ensure the Share Insurance Fund remains healthy and fortify the system’s defenses for potential risks ahead. With the rise in composite CAMELS code 3 credit unions, the Share Insurance Fund’s general reserve balance increased by $10.2 million in the third quarter, as shown on slide 4. At the end of the quarter, the reserve balance totaled $214.3 million, with $7.3 million set aside for specific reserves and $207 million for general reserves.
Eugene, when you look at the number of credit union failures and the cost to the Share Insurance Fund, as shown on slide five, the actual cash losses have been small — about $1.4 million year-to-date. Please elaborate on why general reserves are high when actual cash losses have been small. Also, please discuss the NCUA’s methodology for reserving for potential losses to the Share Insurance Fund. For example, I’ve long had concerns that the Share Insurance Fund’s current reserve methodology does not consider black swan events.
Thank you, Eugene, for that response. We should ensure our methodology accounts for all risks present within the system and adjust as necessary.
My next question focuses on slide six, which shows the Share Insurance Fund’s portfolio. As you reported, the NCUA reached its goal of allocating $4 billion of the Share Insurance Fund’s investments to overnights. Thank you. We made this change to ensure adequate liquidity. I understand the investment committee will soon be evaluating next steps. Where do you think the Share Insurance Fund’s allocations will be at the end of the year and into 2024?
Thank you, Eugene, for clarifying that point. It’s important that the Share Insurance Fund’s portfolio is structured to meet both our immediate and long-term needs.
The NCUA is committed to protecting credit union members and the safety and soundness of the credit union system. No one has ever lost a single penny of insured share deposits. Should the stress in the credit union system increase, we must take necessary actions to maintain the system’s stability, safeguard consumers’ share deposits, and ensure the Share Insurance Fund’s strength. Fortunately, I know that the NCUA team is prepared to meet any challenges that we might face going forward.
Thank you again, Eugene, for your briefing today. That concludes my remarks. I now recognize Vice Chairman Hauptman.