10 THE NAFCU JOURNAL SEPTEMBER–OCTOBER 2022 INVESTING IN THE SIF By Curt Long, NAFCU Chief Economist and Vice President of Research THE BOTTOM LINE The approach of Autumn brings with it several associated seasons: a new school year, a new football season, and, for credit unions, budget season. It is also a time when the NCUA Share Insurance Fund (NCUSIF or SIF) is most heavily scrutinized. While NAFCU is constantly monitoring the fund and the NCUA’s administration of it, most credit unions are addressing more important challenges. But budget season inevitably prompts the question of whether a SIF premium is on tap for the coming year. Fortunately, the answer to that question is most likely not. Whether a premium may be needed beyond this year will depend critically on how interest rates evolve. The SIF is a $20 billion fund whose operations are fairly simple. The key measure of health for the SIF is the equity ratio, which is analogous to a credit union’s net worth ratio and is simply defined as total equity—which consists of retained earnings and insured credit unions’ one-percent capitalization deposits— divided by total insured shares.1 The equity ratio operates in a window formed by two thresholds: a 1.2 percent statutory floor, below which the NCUA must establish a restoration plan, and the normal operating level (NOL) established by the NCUA, above which level the agency must issue distributions. The NOL historically was set at 1.3 percent but currently sits at 1.33 percent. There are four primary drivers of the equity ratio: share growth, investment yield, fund losses due to credit union failures, and operating expenses. While loss expenses can have a big impact in times of distress, those events are rare. Typically, the biggest drivers are share growth and investment yield. Higher share growth tends to reduce the equity ratio. Although credit unions contribute to fund equity in amounts proportional to share growth, those contributions are only one percent of insured shares, while the equity ratio is generally 20–30 basis points higher. That gap accounts for the diluting effect of share growth. This means that in most years, whether the equity ratio increases, or declines, depends on whether the SIF’s investment portfolio is able to earn a return that compensates for that year’s growth in insured shares. By making a few simplifying assumptions, we can establish a nearly linear relationship between the two, which we call the “hurdle rate” as shown in Chart 1. For any given level of share growth, investment yield above the hurdle rate (i.e., in the top left area of the Chart 1: NCUSIF Annual Share Growth & Investment Yield Investment Yield (%) Insured Share Growth (%) Note: Hurdle rate represents investment yield required to maintain a stable equity ratio for a given level of insured share growth. Sources: NCUA, NAFCU analysis 7 6 5 4 3 2 1 0 0 2 4 6 8 10 12 • 2000–07 • 2008–09 • 2010–14 • 2015–21 14 16 18 20 Hurdle Rate 2021 2020 2008
RkJQdWJsaXNoZXIy MTY1NDIzOQ==