What is the Equity Ratio?
The NCUSIF equity ratio is a general measure of the health of the fund and is calculated as the sum of federally-insured credit unions’ (FICU) capital contribution of one percent of their insured shares and the fund’s retained earnings, divided by total insured shares. Federal law requires the normal operating level (NOL) for the NCUSIF to fall between 1.20 percent and 1.50 percent, and the NOL for the equity ratio has been historically set at 1.30 percent.
If the NCUSIF finishes a year with an equity ratio above the NOL, the excess funds are returned to FICUs under ordinary circumstances. If the ratio falls below 1.20 percent, the NCUA board is required to assess a premium charge to restore the ratio to at least that level. However, so long as the equity ratio consistently falls within the statutory range of 1.20 to 1.30 percent, no premium is required.
Temporary Corporate Credit Union Stabilization Fund (TCCUSF or Stabilization Fund)
On May 20, 2009, President Obama signed into law the Helping Families Save Their Homes Act of 2009. The legislation amended the Federal Credit Union Act to provide the NCUA with authorities to mitigate costs associated with stabilizing the corporate credit union system, so those costs would not have to be borne by the NCUSIF.
Acting under its new authority granted by Congress, the NCUA Board implemented the TCCUSF in June 2009 to cover the costs of the Corporate System Resolution Program, approved in September 2010 as a comprehensive strategy to address the failure of five corporate credit unions due to investment losses. Initially, the Stabilization Fund was set to expire after seven years. However, the NCUA and the Department of the Treasury agreed in September 2010 to extend the life of the Stabilization Fund until June 30, 2021.
Under Section 202 of the Federal Credit Union Act, any NCUSIF premiums or assessments must be shared proportionally by all FICUs based on the credit union's insured shares. The Corporate System Resolution Program was established as a means to cover corporate resolution costs within the credit union system.
Under the Federal Credit Union Act, the NCUA Board has the authority to determine annual assessments until the Stabilization Fund expires in June 2021. Whether credit unions will be subject to future assessments is based on a number of factors, including the current year's cash needs relative to the Stabilization Fund, as well as performance and projected losses and cash flows on the Legacy Assets. As of the third quarter of 2016, the NCUA projected there would likely be no need for future assessments. In fact, the projected net assessments range of negative $4.9 billion to negative $3.4 billion indicated the possibility of a refund at the end of the Stabilization Fund in 2021. Further, in October 2016, the NCUA fully repaid the $1 billion outstanding balance on the agency's borrowing line with the U.S. Treasury. With this final payment, the Stabilization Fund's outstanding borrowings were fully paid off, indicating that future rebates or recoveries to insured credit unions may be possible.
On July 20, 2017, the NCUA Board proposed to close the Stabilization Fund in 2017 and increase, for the time being, the NOL of the NCUSIF. At its September meeting, the NCUA Board voted to close the TCCUSF effective October 1, 2017, transferring all Stabilization Fund assets and liabilities to the NCUSIF. After closure, the NCUSIF would assume the liabilities of the Stabilization Fund, including any potential declines in market value of legacy assets collateralizing the NCUA Guaranteed Notes (NGNs). As such, the NCUA increased the NOL from 1.30 to 1.39 percent to offset the perceived risk from the assumption of the Stabilization Fund's liabilities, as well as to protect from moderate recessions.
According to the NCUA, the Board was proposing to raise the NOL to maintain a counter-cyclical insurance fund that accounts for economic downturns. The NCUA estimated that closing the Stabilization Fund and transferring its assets to the NCUSIF would increase the equity ratio to approximately 1.45 to 1.47 percent. When the equity ratio exceeds the NOL, along with other statutory requirements that have already been met, the Federal Credit Union Act requires the NCUSIF to make a pro rata distribution to credit unions based on the equity ratio's excess over the NOL.