NCUA Stabilization Fund Proposed Closure

From the NCUA –

NCUA Board seeks comment on Stabilization Fund Closure and Share Insurance Fund Normal Operating Level

Credit union system stakeholders are invited to comment on NCUA’s proposed plan to close the Stabilization Fund in 2017. To facilitate the closure and ensure the Share Insurance Fund has sufficient equity to absorb potential losses on NCUA’s claims against the asset management estates, the Board is proposing to raise the Share Insurance Fund’s equity ratio to 1.39 percent from the current 1.30 percent. Comments in response to this request must be submitted by September 5, 2017 to be assured of consideration.

Commenters are encouraged to provide the specific basis for their comments and, to the extent feasible, documentation to support any recommendation. Comments can be submitted on the Proposed Rule web page. Additional methods for providing comments are included in the Federal Register Notice.

NCUA will hold a webinar on Wednesday, August 9, beginning at 2 p.m. Eastern to discuss NCUA’s Proposed Stabilization Fund Closure Plan and answer stakeholder questions. Register for the webinar here.

Closing the Stabilization Fund and Setting the Share Insurance Fund Normal Operating Level

The Temporary Corporate Credit Union Stabilization Fund was created in May 2009, to accrue the losses from five failed corporate credit unions and assess insured credit unions for such losses over time. But for the creation of the Stabilization Fund, these losses would have been borne by the National Credit Union Share Insurance Fund, exhausting the Share Insurance Fund’s retained earnings and significantly impairing credit unions’ one percent contributed capital deposit. The Stabilization Fund also is used to account for the costs of the Corporate System Resolution Program and provide short-term and long-term funding to resolve a portfolio of residential mortgage-backed securities, commercial mortgage-backed securities, other asset-backed securities, and corporate bonds, collectively referred to as Legacy Assets. Under the Corporate System Resolution Program, NCUA created a re-securitization program where NCUA issued a series of NCUA Guaranteed Notes that were sold to investors to provide long-term funding for the Legacy Assets.

The Stabilization Fund provided funding for NCUA’s guarantees on the NGNs and for resolution of the liquidated corporate credit union asset management estates through two primary sources: borrowings on NCUA’s $6 billion line of credit with the U.S. Treasury, which was fully repaid in October 2016, and $4.8 billion in Stabilization Fund assessments paid by insured credit unions. The Stabilization Fund is currently scheduled for closure in 2021. However, the Federal Credit Union Act gives the NCUA Board the authority to close it before the scheduled closure.

NCUA is proposing to close the Stabilization Fund in 2017 now that its purpose has been fulfilled. Closing the Stabilization Fund at this time would result in a distribution of all assets and liabilities to the Share Insurance Fund as required by law. This distribution would increase the Share Insurance Fund’s net position and result in an increase in the equity ratio. However, given the nature of certain assets and liabilities of the Stabilization Fund, the Share Insurance Fund’s assumption of these assets and liabilities will introduce additional risk of volatility to the Share Insurance Fund’s equity ratio.

The Share Insurance Fund equity ratio is the total of credit unions’ one percent contributed capital deposits and retained earnings, less any gain or loss on investments, divided by total insured shares. Per the Federal Credit Union Act, the normal operating level is an equity ratio set by the NCUA Board and may not be less than 1.20 percent and may not be more than 1.50 percent.

NCUA proposes to raise the normal operating level to 1.39 percent to help ensure the Share Insurance Fund has sufficient equity to withstand a moderate recession without the equity ratio falling below 1.20 percent, at which point a premium or fund restoration plan would be required by statute.

Additional information on the methodology used to determine the proposed normal operating level, legal considerations regarding closure of the Stabilization Fund, and accounting for the closure of the Stabilization Fund is included in the materials presented at the July 20, 2017 Board meeting:

Specifically, the Board is interested in comments whether to:

  • Close the Stabilization Fund in 2017, close it at some future date, or wait until it is currently scheduled to close in 2021.
  • Set the normal operating level based on the Share Insurance Fund’s ability to withstand a moderate recession or set the level based on the Share Insurance Fund’s ability to withstand a severe recession.
  • Base the approach to setting the normal operating level on preventing the equity ratio from declining below 1.20 percent or some other higher minimum level.

Share Insurance Fund Equity Distributions

Additionally, the Board is seeking comment on a notice of proposed rulemaking for Section 741.1 of NCUA’s Regulations regarding Share Insurance Fund Equity Distributions. Information presented at the Board meeting is available at the following links:

Additional Resources

Additional information related to the Stabilization Fund and NGNs is available using the links below:

Additional information on the Share Insurance Fund equity ratio and normal operating level is available using the links below:

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