NAFCU Journal November December 2021

10 THE NAFCU JOURNAL November–December 2021 THE OUTLOOK FOR THE SHARE INSURANCE FUND By Curt Long THE BOTTOM LINE T he two main stressors on credit union capital since the start of the COVID-19 pandemic have been high share growth and low interest rates. The latest data indicate that the former is beginning to relax, while the latter is likely to remain an issue for some time to come. Those same two factors have also led to a decline in the equity of the Share Insurance Fund (SIF). However, the odds of a premium assess- ment in 2022 are slim. A greater concern is the continuing push from the NCUA to accrue greater managerial authorities over the fund. From the end of 2019 through June 2021, the equity ratio—which is the ratio of fund equity to insured shares—declined by 12 basis points to 1.23%. That leaves the ratio just three basis points above its 1.20% statutory minimum. Any breach of that floor would require the NCUA to establish a restoration plan, which could involve a premium charge for insured credit unions. Much of that decline is illusory, however, owing to a timing mismatch. While the equity ratio is calculated based on current insured shares, the one-percent capitalization deposits that insured credit unions maintain are generally six months behind. This results in a perma- nent understatement of the true health of the SIF. When share growth increases, this outage grows larger. Currently, it represents five basis points of the 12-basis point decline in the equity ratio. Factoring that into the present level of the equity ratio, the cushion above the statutory floor is more like eight basis points than three. The factors resulting in the remaining seven basis points are outlined in the accompanying pie chart. Share growth is by far the biggest factor, accounting for more than half of the overall decline. Note that this is separate from the aforementioned timing mismatch. In addition to that, share growth has diluted the equity ratio of the SIF by roughly four basis points since 2019. Low interest rates have contributed a single basis point to the overall drop, while growth in loss reserves has played a negligible role. Had the trends that were in place at the end of 2019 prevailed, we would have expected a 2-basis point decline in the equity ratio through June 2021. Contributions to Equity Ratio Decline Since 2019 Interest rates (1.0 bps) Share growth (4.2 bps) bps = basis points Source: NCUA, NAFCU calculations Credit impact (0.1 bps) Trend (2.0 bps)