NAFCU Journal March April 2021

8 THE NAFCU JOURNAL March–April 2021 T he Share Insurance Fund (SIF) has been subject to much scrutiny during the COVID-19 pandemic. Thus far, the fund has suffered few losses as credit union capital has remained steady and failures remain rare. Uncertainty persists in the near-term, but there are also some important devel- opments that could have a large impact on the SIF in the years to come. Impact from Interest Rates The first is a repeat of the low-interest rate environment which lasted for the better part of the previous economic recovery following the financial crisis. This took a toll on earnings, leading to a gradual decline in the fund’s equity ratio until 2017, when the merger with the Temporary Corporate Credit Union Stabilization Fund (TCCUSF) injected the SIF with a substantial dose of equity. A similar path could lie ahead as the Federal Reserve has given no indication that it will raise its benchmark interest rate prior to 2023 or later. Even once rates begin to climb, it will still take time before they reach a level that will afford enough investment yield to offset operating expenses and keep pace with share growth. Changes to NOL Methodology Another topic that NAFCU is watching closely is the recent inflation in the normal operating level (NOL). The NOL is the threshold for fund distributions to insured credit unions. If the equity ratio ends the year above the NOL, a distribution in the amount of the surplus is required by the Federal Credit Union Act. The 2017 merger with the TCCUSF provided the occasion for the NCUA to adopt a new methodology for calculating the NOL, the outcome of which has been a substantial increase in the NOL from its historical precedent of 1.3 percent to 1.38 percent today. The methodology relies on the Federal Reserve’s adverse stress test scenario used for banking organizations with $100 billion or more in assets. Because the Fed has ceased publishing an adverse stress scenario, the NCUA will need to revisit its meth- odology. Discussion to date suggests that the agency may be considering an even more extreme methodology that would raise the NOL further. This would make it much less likely that a distribu- tion is initiated in the future, and if it is, the amount would be much lower than under the current method. Agency Authorities Finally, agency officials have advocated for expanding the NCUA’s statutory authorities to charge premiums and man- age distributions. Board Chairman Todd Harper has been particularly vocal about gaining parity with the FDIC in its author- ities over the Deposit Insurance Fund (DIF). Some key areas could include: (1) raising the statutory minimum equity ratio from 1.2 percent; (2) removing the 1.5 percent upper bound on the NOL; and (3) getting discretion over whether to pay a distribution in the event the equity ratio exceeds the NOL. Each of these authorities was granted to the FDIC as part of the Dodd-Frank Act in an effort to provide enough scope to manage the DIF in a more prudent way. But the SIF fared much better than the DIF during and after that crisis. From 2009 through 2011, average annual retail institution losses per $100 of insured deposits totaled 44 cents for the DIF versus 2 cents for the SIF. Yet another change that could be sought would be to remove the prohibition on charging premiums when the equity ratio exceeds 1.3 percent. To date, the NCUA has not offered a compelling reason for needing to acquire these expanded authorities, and NAFCU will continue to fight to keep credit union capital under the control of the members that own it. Optimism is high for now, and it appears the pandemic will end without a SIF premium. However, the aforementioned issues will threaten credit unions with additional and potentially unneces- sary premium charges down the road. NAFCU remains committed to a strong Share Insurance Fund that allows credit unions to retain as much of their own capital as possible. Curt Long is NAFCU’s chief economist and vice president of research. LONG-TERM OUTLOOK FOR THE SHARE INSURANCE FUND By Curt Long THE BOTTOM LINE