Closing the Temporary Corporate Credit Union Stabilization Fund and Setting the Share Insurance Fund Normal Operating Level, 34982-34990 [2017-15686]
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Federal Register / Vol. 82, No. 143 / Thursday, July 27, 2017 / Notices
collecting the information, including
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information collection:
Title: Presidential Library Facilities.
OMB number: 3095–0036.
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Type of review: Regular.
Affected public: Presidential library
foundations or other entities proposing
to transfer a Presidential library facility
to NARA.
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Frequency of response: On occasion.
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40 hours.
Abstract: The information collection
is required for NARA to meet its
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submit a report to Congress before
accepting a new Presidential library
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Swarnali Haldar,
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[FR Doc. 2017–15792 Filed 7–26–17; 8:45 am]
BILLING CODE 7515–01–P
NATIONAL CREDIT UNION
ADMINISTRATION
Closing the Temporary Corporate
Credit Union Stabilization Fund and
Setting the Share Insurance Fund
Normal Operating Level
National Credit Union
Administration (NCUA).
ACTION: Notice and request for comment.
AGENCY:
The NCUA Board (Board) is
considering closing the Temporary
Corporate Credit Union Stabilization
Fund (Stabilization Fund) in 2017, prior
to its scheduled closing date in June
2021. Closing the Stabilization Fund
and distributing all assets, property, and
funds to the National Credit Union
Share Insurance Fund (Share Insurance
Fund) will increase the Share Insurance
Fund’s equity ratio and allow for the
return to insured credit unions of any
equity above the normal operating level.
The return of excess equity would be
accomplished through a distribution
from the Share Insurance Fund in
conformance with the Federal Credit
Union Act (the Act). However, given the
nature of certain assets and liabilities of
the Stabilization Fund, the Share
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SUMMARY:
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Insurance Fund’s assumption of these
assets and liabilities will introduce
additional risk of volatility to the Share
Insurance Fund’s equity ratio.
Therefore, the Share Insurance Fund
would need to hold sufficient equity to
cover potential changes in the value of
its claims on the failed corporate credit
union asset management estates. In
addition, the Share Insurance Fund
needs to have enough equity to cover
other risks to the equity ratio, such as
losses on insured credit unions, under
the same macroeconomic conditions
that create volatility in the asset
management estate values. To ensure
the Share Insurance Fund has sufficient
equity to absorb these risks, the Board
proposes to raise the normal operating
level to 1.39 percent.
This notice provides a discussion of
the reasons the Board is proposing to
close the Stabilization Fund in 2017 and
the basis used to determine the normal
operating level necessary to account for
the additional risk to the Share
Insurance Fund. In addition, the notice
sets forth a new policy by which the
Board would set the normal operating
level. The Board solicits comments on
each of these proposed actions.
DATES: Comments must be received on
or before September 5, 2017 to be
assured of consideration.
ADDRESSES: You may submit comments
by any of the following methods (Please
send comments by one method only):
• NCUA Web site: https://
www.ncua.gov/about/pages/boardcomments.aspx
• Email: Address to boardcomments@
ncua.gov. Include ‘‘[Your name]—
Comments on Stabilization Fund
Closure’’ in the email subject line.
• Fax: (703) 518–6319. Use the
subject line described above for email.
• Mail: Address to Gerald Poliquin,
Secretary of the Board, National Credit
Union Administration, 1775 Duke
Street, Alexandria, VA 22314–3428.
• Hand Delivery/Courier: Same as
mail address.
Public Inspection: You can view all
public comments on NCUA’s Web site
at https://www.ncua.gov/about/pages/
board-comments.aspx as submitted,
except for those we cannot post for
technical reasons. NCUA will not edit or
remove any identifying or contact
information from the public comments
submitted. You may inspect paper
copies of comments in NCUA’s
headquarters at 1775 Duke Street,
Alexandria, VA 22314, by appointment
weekdays between 9 a.m. and 3 p.m. To
make an appointment, call (703) 518–
6360 or send an email to EIMail@
ncua.gov.
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FOR FURTHER INFORMATION CONTACT:
Anthony Cappetta, Supervisory
Financial Analyst, at 1775 Duke Street,
Alexandria, VA 22314, or telephone:
(703) 518–1592.
SUPPLEMENTARY INFORMATION:
I. Stabilization Fund Background
II. Legal Matters
III. Closing the Stabilization Fund
IV. The Normal Operating Level
V. Request for Comment
I. Stabilization Fund Background
Public Law 111–22, Helping Families
Save Their Homes Act of 2009 (Helping
Families Act), signed into law by the
President on May 20, 2009 created the
Temporary Corporate Credit Union
Stabilization Fund. Congress provided
NCUA with this temporary fund to
accrue the losses of the corporate credit
union system and assess insured credit
unions for such losses over time. This
prevented insured credit unions from
bearing a significant burden for losses
associated with the failure of five
corporate credit unions within a short
period. Without creation of the
Stabilization Fund, these corporate
credit union losses would have been
borne by the Share Insurance Fund. The
magnitude of losses would have
exhausted the Share Insurance Fund’s
retained earnings and significantly
impaired credit unions’ one percent
contributed capital deposit.1 The
deposit impairment, along with
premiums that would have been
necessary to restore the Share Insurance
Fund’s equity ratio, would have resulted
in a significant, immediate cost to credit
unions at a time when their earnings
and capital were already under stress
due to the Great Recession.2 In June
2009, the Board formally approved use
of the Stabilization Fund for accounting
for the costs of the Corporate System
Resolution Program.3 Since then, all of
these costs have been accounted for in
the financial statements of the
Stabilization Fund.
The Act specifies that the
Stabilization Fund will terminate 90
days after the seven-year anniversary of
its first borrowing from the U.S.
Treasury.4 The first borrowing occurred
1 Prior to reassignment of these costs to the
Stabilization Fund, the capitalization deposit
impairment would have been 89 basis points.
2 Because the contributed capital deposit is
reflected as an asset on the financial statements of
insured credit unions, under accounting rules any
impairment results in an immediate expense to
credit unions.
3 For more details on the corporate system
resolution program, please see the NCUA Corporate
System Resolution Costs Web page (https://
www.ncua.gov/regulation-supervision/Pages/
corporate-system-resolution.aspx).
4 12 U.S.C. 1790e(h).
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on June 25, 2009, making the original
closing date September 27, 2016.
However, the Act provided the Board,
with the concurrence of the Secretary of
the U.S. Treasury, authority to extend
the closing date of the Stabilization
Fund. In June 2010, the Board voted to
extend the life of the Stabilization Fund
and on September 24, 2010, NCUA
received concurrence from the Secretary
of the U.S. Treasury to extend the
closing date to June 30, 2021.
In March 2009, the Board conserved
U.S. Central Federal Credit Union and
Western Corporate Credit Union. In
September 2010, the Board conserved
three additional corporate credit unions
and publicly announced the Corporate
System Resolution Program. The Board
placed the five corporate credit unions
into liquidation in the fourth quarter of
2010. The Board, as Liquidating Agent,
administers the assets and liabilities of
the five failed corporate credit unions in
separate legal entities, referred to as
asset management estates.
The Corporate System Resolution
Program included providing 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 the Legacy Assets) held by
the liquidated corporate credit unions.
Under the Corporate System Resolution
Program, NCUA created a resecuritization program where NCUA
issued a series of NCUA Guaranteed
Notes (NGNs). The sale of NGNs to
investors has provided long-term
funding for the Legacy Assets. The
NGNs are guaranteed by NCUA in its
Agency capacity, backed by the full
faith and credit of the United States.
While the accounting for obligations
associated with the NGNs occurs
through the Stabilization Fund, the
guaranty is not specific to the
Stabilization Fund. All NCUA agency
funds for which payments on the NGN
guarantees is a permitted use, including
the Share Insurance Fund, are potential
sources for guaranty obligations prior to
any recourse to the U.S. Treasury.
During its life, the Stabilization Fund
provides the primary funding necessary
for NCUA’s guarantees on the NGNs and
to complete the resolution of the
corporate credit union asset
management estates. The majority of
this funding has been from two primary
sources: Borrowings of $5.1 billion
(peak outstanding balance) on NCUA’s
$6 billion line of credit with the U.S.
Treasury and $4.8 billion in
Stabilization Fund assessments paid by
insured credit unions.
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In 2010, when NCUA announced the
Corporate System Resolution Program,
the outstanding principal balance of the
Legacy Assets totaled over $40 billion—
about four times the size of the Share
Insurance Fund. The initial outstanding
balance of guaranteed notes backed by
the Legacy Assets and sold to investors
through the NGN program in 2010 and
2011 totaled approximately $28
billion—almost three times the size of
the Share Insurance Fund at that time.
As of March 2017, the outstanding
principal balance of the Legacy Assets
and the outstanding balance of the
guaranteed notes back by them have
declined to $12.7 billion and $7.5
billion, respectively. Both of these
balances are less than the current size of
the Share Insurance Fund, which is
$13.2 billion in total assets as of March
31, 2017.
The projected range of lifetime Legacy
Asset defaults was $13.2 billion to $16.4
billion as of December 2011. As of
March 2017, the projected range of
lifetime Legacy Asset defaults has
declined to $9.9 billion to $10.3 billion.
In addition, NCUA’s pursuit of legal
recoveries in its capacity as Liquidating
Agent against various third parties in
connection with the Legacy Assets has
resulted in net recoveries of
approximately $3.8 billion after fees and
expenses.5 Improved projected
performance of the Legacy Assets and
legal recoveries are the primary reasons
the Stabilization Fund’s net position has
increased from negative $7.5 billion as
of December 2010 to a positive $1.6
billion as of March 2017.
It is now possible for the remaining
obligations of the Corporate System
Resolution Program to be borne by the
Share Insurance Fund without
inordinate risk, provided additional
equity is maintained while the exposure
to remaining resolution program
obligations exist. As a result, the Board
believes the purpose of the Stabilization
Fund has been fulfilled.6 Therefore, the
Board proposes to close the
Stabilization Fund in 2017. Closing the
Stabilization Fund at this time would
increase the equity ratio of the Share
Insurance Fund and require NCUA to
distribute any resulting equity above the
normal operating level to insured credit
5 NCUA does not include potential future legal
recoveries in loss projections, as they are inherently
inestimable. For a list of legal recoveries to date, see
NCUA’s Legal Recoveries Web site (https://
www.ncua.gov/regulation-supervision/Pages/
corporate-system-resolution/legal-recoveries.aspx).
6 Worthy of note, if the Stabilization Fund is
closed in 2017, it would have been in operation
about one year longer than the original seven years
provided for in the Act.
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unions.7 The Board is simultaneously
publishing a separate proposal to update
§ 741.4 of NCUA’s Rules and
Regulations regarding the method for
Share Insurance Fund distributions to
insured credit unions.
II. Legal Matters
The Act sets forth the purpose,
permissible expenditures, borrowing
and repayment authorities, assessment
authority, investment authority, and
procedures for closing the Stabilization
Fund.8 The statute specifically
prescribes the conditions for closing the
Stabilization Fund and distributing its
holdings.9 The Board has the authority
under the Act to close the Stabilization
Fund at its discretion at any time when
it has no deficit, which then requires
that all of its assets and funds be
distributed to the Share Insurance
Fund.10 The Stabilization Fund’s
financial statements have reflected a
positive net position since June 30,
2014. Therefore, there are currently no
statutory barriers for the Board in
regards to closing the Stabilization Fund
in 2017. Once the Stabilization Fund is
closed, there is no statutory authority
that permits NCUA to re-open it for any
reason.
The Board is aware of industry
opinions that the Act may permit a
distribution to insured credit unions
directly from the Stabilization Fund.
The Board does not believe this is
permissible for the following reasons.
NCUA’s authority to use Stabilization
Fund money arises from the reference to
12 U.S.C. 1783(a) in the legislation that
created the Stabilization Fund.11
Specifically, the legislation provides
that ‘‘[m]oney in the Stabilization Fund
shall be available upon requisition by
the Board . . . for making payments for
the purposes described in § 1783(a) of
this title.’’ 12 Except with respect to
administrative payments, the legislation
limits this authority to the context of a
‘‘conservatorship, liquidation, or
threatened conservatorship or
liquidation, of a corporate credit
union.’’ 13 Under section 1783(a),
7 The potential return of excess equity would be
in the form of a distribution to insured credit
unions from the Share Insurance Fund as provided
for in the Act. Stakeholders should not confuse this
with potential recoveries on depleted member
capital. Until senior obligations of each particular
estate can be satisfied, there will not be
distributions for any recoveries on depleted
member capital.
8 12 U.S.C. 1790e.
9 12 U.S.C. 1790e(h).
10 12 U.S.C. 1790e(g), (h).
11 12 U.S.C. 1790e(b).
12 12 U.S.C. 1790e(b)(1).
13 Id.
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permissible uses include payments of
insurance under section 1787 of the
title, for providing assistance and
making expenditures under section
1788 of the title in connection with the
liquidation or threatened liquidation of
insured credit unions, and for such
administrative and other expenses
incurred in carrying out the purposes of
the subchapter as the Board may
determine to be proper.
Here, a distribution, such as an
assessment rebate, does not plainly meet
any of those criteria, assuming an
appropriate nexus to a corporate credit
union conservatorship or liquidation
could be established in each instance.
First, a distribution to insured credit
unions from the Stabilization Fund, by
its namesake alone, would not be a
payment of insurance under section
1787. Further, a distribution could not
be in the form of assistance under
section 1788, since it would not go to
credit unions for the assistance
purposes described in section 1788.
Finally, a distribution is not an
‘‘administrative expense’’ or ‘‘other
expense’’ in the context of the Act.
While the general definition of an
expense can be quite broad,14 section
1782(c)(3) of the Act expressly governs
distributions to insured credit unions.
Distributions under section 1782(c)(3)
are not included as an authority that
Congress granted for the Stabilization
Fund, particularly since Congress
expressly tied Stabilization Fund
authority to section 1783(a), to the
exclusion of any other section. On the
contrary, the Stabilization Fund
legislation references section 1782(c)(3)
only with respect to distributions
flowing into the Stabilization Fund, in
any circumstances where U.S. Treasury
borrowings remain outstanding.15
In the only other circumstance where
the legislation references a distribution
in any manner, it is in reference to the
Stabilization Fund’s closing.16 In that
circumstance, the Act limits a
distribution of all ‘‘funds, property or
other assets remaining in the
Stabilization Fund’’ to one recipient:
The Share Insurance Fund.17 For these
reasons, the Board believes the
Stabilization Fund must be closed
before a distribution of excess funds to
insured credit unions can occur for
purposes other than those described in
section 1783(a).
III. Closing the Stabilization Fund
A. Accounting and Financial Reporting
The financial statements of the
Stabilization Fund and the Share
Insurance Fund are presented under
standards promulgated by the Federal
Accounting Standards Advisory Board
(FASAB). These financial statements are
presented and audited by calendar year.
With the closing of the Stabilization
Fund, NCUA intends to prepare final
financial statements for the Stabilization
Fund as of September 30, 2017. These
financial statements would be audited
by NCUA’s Office of the Inspector
General.
Per applicable accounting standards,
the assets and liabilities of the
Stabilization Fund will be distributed to
the Share Insurance Fund at September
30, 2017 values. This transfer will
increase the net position of the Share
Insurance Fund, resulting in an increase
to the equity ratio. As required by
applicable accounting standards, certain
budgetary accounts will also transfer
and be shown in the Statement of
Budgetary Resources. NCUA determined
the applicable accounting standards in
consultation with an independent
accounting firm.
The post-closure financial statements
and note disclosures for the Share
Insurance Fund will continue to provide
the same level of detail about the
receivables from the corporate asset
management estates and the related
fiduciary activities. That is, the detailed
note disclosures in the Stabilization
Fund’s financial statements will now be
in the note disclosures of the Share
Insurance Fund’s financial statements.
NCUA does not envision any changes to
the accounting for the asset management
estates. The accounting for each asset
management estate has and will remain
distinct, which is a requisite in fulfilling
the Board’s responsibility as Liquidating
Agent.
For illustrative purposes, Table 1
depicts the March 31, 2017 Share
Insurance Fund balance sheet
(unaudited), the March 31, 2017
Stabilization Fund balance sheet
(unaudited), and the pro-forma Share
Insurance Fund balance sheet
(unaudited) as if the Stabilization Fund
were closed on that day.18
TABLE 1—SHARE INSURANCE FUND AND STABILIZATION FUND BALANCE SHEETS, PRE- AND POST-CLOSURE, AS OF
MARCH 31, 2017
[Dollars in millions]
Share
insurance
fund
(pre-closure)
Stabilization
fund
(pre-closure)
Share
insurance
fund
(post-closure)
Fund Balance with Treasury & Investments .................................................................................................................
Notes Receivable, Net ..................................................................................................................................................
Capitalization Deposits Receivable ...............................................................................................................................
Receivable from Asset Management Estates, Net (NPCU) .........................................................................................
Receivable from Asset Management Estates, Net (CCU) ...........................................................................................
Accrued Interest and Other Assets ...............................................................................................................................
$12,766.2
8.7
316.5
51.3
........................
61.2
$700.4
........................
........................
........................
876.3
2.7
$13,466.6
8.7
316.5
51.3
876.3
63.9
Total Assets ...........................................................................................................................................................
13,203.9
1,579.4
14,783.3
26.0
........................
245.6
10,285.8
1.1
........................
........................
........................
27.1
........................
245.6
10,258.8
Assets
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Liabilities and Net Position
Accounts Payable and Other Liabilities ........................................................................................................................
Borrowings from U.S. Treasury ....................................................................................................................................
Insurance and Guarantee Program Liabilities ..............................................................................................................
Net Position—Contributed Capital Deposits .................................................................................................................
14 Black’s Law Dictionary characterizes an
expense as ‘‘[a]n expenditure of money, time, labor
or resources to accomplish a result.’’ Black’s Law
Dictionary 617 (8th ed. 2004).
15 12 U.S.C. 1790e(e).
16 12 U.S.C. 1790e(h).
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17 Id. Within 90 days following the seventh
anniversary of the initial Stabilization Fund
advance, or earlier at the Board’s discretion, the
Board shall distribute any funds, property, or other
assets remaining in the Stabilization Fund to the
Insurance Fund and shall close the Stabilization
Fund.
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18 The impact on the post-closure Share Insurance
Fund financial statements will be based on actual
results at the time the Stabilization Fund is closed
and the presentation may vary somewhat due to the
specific application of accounting standards on
individual line items.
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TABLE 1—SHARE INSURANCE FUND AND STABILIZATION FUND BALANCE SHEETS, PRE- AND POST-CLOSURE, AS OF
MARCH 31, 2017—Continued
[Dollars in millions]
Share
insurance
fund
(pre-closure)
Stabilization
fund
(pre-closure)
Share
insurance
fund
(post-closure)
Net Position—Cumulative Results of Operations .........................................................................................................
2,646.5
1,578.3
4,224.8
Total Liabilities and Net Position ...........................................................................................................................
13,203.9
1,579.4
14,783.3
Total Net Position ...........................................................................................................................................
12,932.3
1,578.3
14,510.6
Subsequent to March 31, 2017, and
prior to the end of the year, there are
several items that have been or are
expected to be recognized that will
ultimately affect the net position of the
Share Insurance Fund. Table 2 includes
these additional items and the effect on
the projected net position as of
December 31, 2017.
TABLE 2—BREAKDOWN OF PROJECTED NET POSITION COMPONENTS BY DECEMBER 31, 2017
[Dollars in thousands]
Amount
(in millions)
Component
March 31, 2017 Pro-Forma Net Position (Post-Closure)—From Table 1 Above ...........................................................................
Plus: Legal Recoveries that Increase the Value of the Receivable from the AMEs ...............................................................
Plus: Estimated Recovery on U.S. Central Capital Note 19 .....................................................................................................
Plus: Share Insurance Fund Net Income 2017q2–2017q4 21 ..................................................................................................
Plus: Adjustment to 1% Contributed Capital Deposit 22 ...........................................................................................................
$14,511
310
20 500–800
(26)
383
Equals: Adjusted Net Position (Post-Closure), as of 12/31/17 .......................................................................................................
15,678–15,978
B. Effect on Share Insurance Fund
Equity Ratio and Distributions
TheShare Insurance Fund equity ratio
is defined in the Act as the ratio of the
amount of Fund capitalization,
including insured credit unions’ 1
percent capitalization deposits and the
retained earnings balance of the Fund
(net of direct liabilities of the fund and
contingent liabilities for which no
provision has been made) to the
aggregate amount of insured shares in
all insured credit unions.23 It serves as
a measure of the Share Insurance Fund’s
overall strength and ability to absorb
losses. In general, the Act requires the
Board to manage the Share Insurance
Fund’s equity ratio within a range of
1.20 percent to 1.50 percent.
The closure of the Stabilization Fund
would increase the Share Insurance
Fund’s net position. This would result
in an increase to the Share Insurance
Fund’s equity ratio. Table 3 shows the
estimated equity ratio of the Share
Insurance Fund as of December 31, 2017
as if the Stabilization Fund were closed.
TABLE 3—PROJECTED SHARE INSURANCE FUND EQUITY RATIO AS OF DECEMBER 31, 2017
[Dollars in thousands]
Component
Amount
(in millions)
Adjusted Net Position Post Closure—From Table 2 Above ...........................................................................................................
Less: Gain(Loss) on Investments 24 ............................................................................................................................................
$15,678–$15,978
($66)
Equals: Equity Ratio Numerator ......................................................................................................................................................
Equity Ratio Denominator: Projected Insured Shares as of December 31, 2017 25 ......................................................................
Projected Calendar Yearend 2017 Equity Ratio 26 .........................................................................................................................
$15,744–$16,044
$1,089,500
1.45%–1.47%
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The Share Insurance Fund’s calendar
yearend equity ratio is part of the
statutory basis to determine whether
NCUA must make a distribution to
insured credit unions.27 The Act states
‘‘the Board shall effect a pro rata
distribution to insured credit unions
after each calendar year if, as of the end
of that calendar year—
19 The estimated recovery includes U.S. Central’s
portion of the recent legal recoveries.
20 This estimated range only reflects what is
projected to be recognizable by December 31, 2017
under applicable accounting rules, which mainly
includes the portion of the U.S. Central capital note
for which there is cash available for repayment.
21 Assuming current yield on investments,
insurance losses equal to the five-year average, and
operating expenses based on the currently approved
NCUA budget.
22 Based on share growth of 3.71 percent in the
first quarter 2017 and the historical share of
adjusted contributed capital deposit adjustments
collected in October each year.
23 12 U.S.C. 1782(h)(2).
24 Actual gain(loss) on investments as of March
31, 2017 and could be materially different as of
December 31, 2017.
25 Based on 5.8 percent annual insured share
growth, which is the three-year average insured
share growth for the industry.
26 This does not account for extraordinary losses
and/or failures in credit unions, abnormally high
insured-share growth, or a significant downturn in
economic conditions, including declining interest
rates.
27 The equity ratio is also part of the statutory
basis for determining whether a premium or Share
Insurance Fund restoration plan is necessary.
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• Any loans to the Fund from the
Federal Government, and any interest
on those loans, have been repaid;
• The Fund’s equity ratio exceeds the
normal operating level; and
• The Fund’s available assets ratio
exceeds 1.0 percent.’’ 28
As of October 24, 2016, all NCUA
borrowings from the Federal
Government had been repaid. The Share
Insurance Fund’s available asset ratio is
1.21 percent as of March 31, 2017, well
above the 1.0 percent minimum and is
projected to remain above 1.0 percent.29
To the extent the equity ratio exceeds
the normal operating level as of
calendar yearend 2017, a distribution
would be paid to insured credit unions
in accordance with the Act and § 741.4
of NCUA regulations. The distribution
in total would equal the dollar amount
of equity in excess of the normal
operating level. For additional
information on how the pro rata
distribution would be made, see the July
2017 Notice of Proposed Rulemaking on
this subject.
IV. The Normal Operating Level
Per the Act, the normal operating
level is an equity ratio set by the Board
and may not be less than 1.20 percent
and not more than 1.50 percent.30 As
noted above, if the calendar yearend
equity ratio exceeds the normal
operating level, NCUA is required to
make a pro rata distribution to insured
credit unions. The Board has
historically set the normal operating
level as the target equity ratio for the
Share Insurance Fund.
The current normal operating level is
1.30 percent, set by the Board in 2007
based on the Board-approved
methodology in place at that time.
When establishing the 1.30 percent
normal operating level in 2007, the
Board affirmed that the Share Insurance
Fund would maintain a counter-cyclical
posture. In practice, this means the
Share Insurance Fund’s equity should
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28 12 U.S.C. 1782(c)(3). This section is also subject
to 12 U.S.C. 1790e(e).
29 After closure, NCUA estimates the Share
Insurance Fund would hold $4 billion in surplus
funds over the 1.0 percent minimum ratio. NCUA
currently projects $2.8 billion in guaranty payments
on the NGNs after 2017. However, the current
estimate for the funding needs net of related cash
flows is approximately $1 billion.
30 12 U.S.C. 1782(h)(4).
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be built up during periods of economic
prosperity and allowed to decline
during periods of economic adversity. A
counter-cyclical posture allows NCUA
to maintain the Share Insurance Fund at
a level that is sufficient for it to remain
viable even during economic stress
conditions without having to charge a
premium when credit unions can least
afford it.
With the proposed closing of the
Stabilization Fund, the Board
considered whether the current normal
operating level of 1.30 percent would be
sufficient to cover all of the Share
Insurance Fund’s resulting exposures.
To determine this, NCUA modeled the
losses that would be expected under a
moderate and a severe recession.31 For
the two recession scenarios, the agency
modeled the:
• Impact on the equity ratio of the
estimated decline in the value of the
Share Insurance Fund’s claims on the
liquidated corporate credit unions’ asset
management estates—which would be
driven by a reduction in the value of the
Legacy Assets.
• Performance of the Share Insurance
Fund based on the three primary factors
that currently affect the Share Insurance
Fund’s equity ratio: Insured share
growth, yield on investments, and
insurance losses.
The Share Insurance Fund was
modeled over a five-year period and the
Legacy Assets were modeled over their
remaining life.32 NCUA used the
applicable variables describing
economic developments for the Adverse
and Severely Adverse economic
scenarios from the Federal Reserve
Board’s 2017 annual stress test
supervisory scenarios.33 In the Adverse
31 In estimating the equity ratio under various
economic stress scenarios, NCUA must make
estimates and assumptions that affect the model
output. Actual results could differ from NCUA’s
estimates; however, the agency evaluates the
reasonableness of such estimates when analyzing
the model output. The base scenario for modeling
the performance of the Share Insurance Fund is a
moderate economic expansion through the
projection period with Treasury rates assumed to
rise steadily across the maturity spectrum, the
unemployment rate remains low and housing prices
rise slightly.
32 A five-year horizon (beginning at yearend 2017)
was used to cover the cycle of an economic
downturn and the life of the NGN program.
33 Supervisory Scenarios for Annual Stress Test
Required under the Dodd-Frank Act Stress Testing
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scenario, the U.S. economy experiences
a moderate recession, and asset prices
decline. This scenario is characterized
by weakening economic activity,
including higher unemployment, falling
short-term interest rates, long-term
interest rates that slowly rise, a steadily
rising unemployment rate, and
sustained declines in housing prices.
The Severely Adverse scenario is
characterized by a severe global
recession that is accompanied by a
period of heightened stress in corporate
loan markets and commercial real estate
markets. In this scenario, the
unemployment rate spikes, short-term
interest rates fall to near zero, long-term
interest rates fall initially then increase
slightly, and housing prices decline
substantially. Further details on how
these scenarios were applied to model
the value of the claims on the corporate
asset management estates and the
performance of the Share Insurance
Fund are provided below.
A. Determining Equity Needed To Cover
Potential Declines in the Value of
Claims on the Corporate Credit Union
Asset Management Estates
At NCUA’s request, BlackRock
incorporated the Adverse and Severely
Adverse macroeconomic scenarios into
its proprietary models to project cash
flows for all of the Legacy Assets.34 In
both the Adverse and Severely Adverse
macroeconomic scenarios, the value of
the Legacy Assets declines.
Credit spreads indicative of Adverse
and Severely Adverse market conditions
are applied to the forward interest rate
curve to arrive at a discount rate to
calculate the present value of the Legacy
Asset cash flows, as shown in Table 4.
For the Adverse scenario, credit spreads
similar to the period of the U.S. credit
rating downgrade in August 2011 were
used. For the Severely Adverse scenario,
credit spreads similar to the peak of the
Great Recession in 2009 were used.
Rules and the Capital Plan Rule, February 10, 2017
(https://www.federalreserve.gov/newsevents/
pressreleases/files/bcreg20170203a5.pdf).
34 The NGNs remaining after yearend 2017 do not
mature until 2020 and 2021. Because these NGNs
do not have a call feature (other than a clean-up call
provision when the Legacy Asset balances are 10
percent or less or their balances when transferred
to the NGNs, which NCUA does not expect to be
triggered), they cannot be retired early.
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TABLE 4—DISCOUNTED LEGACY ASSET CASH FLOWS
[Dollars in billions]
Scenario
Differences from base
Base
Total .....................................................................................
The projected Legacy Asset cash flows
are aggregated by NGN and run through
the applicable NGN waterfall to
determine their related projected cash
flows. As shown in Table 5, the NGNrelated cash flows include guaranty fees
Adverse
Severely
adverse
Adverse
Severely
adverse
$10.3
$8.3
$7.3
($2.0)
($3.0)
payments have been made. The present
value of the NGN cash flows is
determined by the same discounting
approach discussed above.
paid to NCUA, guaranty payments made
by NCUA to NGN investors for principal
and interest shortfalls, guaranty
reimbursements made to NCUA for any
guaranty payments made, and any
residual cash flows left after all of these
TABLE 5—DISCOUNTED NGN CASH FLOWS
[Dollars in billions]
Scenario
Differences from base
Cash flow
Base
Severely
adverse
Adverse
Severely
adverse
Adverse
Guaranty Fees .....................................................................
Guaranty Payments .............................................................
Guaranty Reimbursements ..................................................
Residuals .............................................................................
$0.1
(3.2)
3.0
3.5
$0.1
(4.0)
3.3
2.1
$0.1
(4.4)
3.5
1.3
$0.0
(0.8)
0.3
(1.4)
$0.0
(1.2)
0.5
(2.2)
Total ..............................................................................
3.4
1.5
0.5
(1.9)
(2.9)
NCUA then applied the unsecuritized projected Legacy Asset cash
flows and NGN cash flows to the
applicable asset management estates
based on the payout priorities in NCUA
regulations.35 This results in an estimate
of the change in the net receivable from
asset management estates due to NCUA,
as well as changes in NCUA’s projected
respectively, the net impact on the value
of NCUA’s claims—and ultimately the
equity ratio—is different, primarily due
to how these funds flow through the
payout priorities applicable to each
asset management estate. This is shown
in Table 6.
recovery on the U.S. Central capital
note.36 For each asset management
estate, the impact of the stress scenarios
will differ depending on the specific
circumstances of the estate. While the
decreases in Legacy Asset and NGN
cash flows under the Adverse and
Severely Adverse scenarios are
approximately $2 billion and $3 billion,
TABLE 6—NET RECEIVABLE TO NCUA PLUS U.S. CENTRAL CAPITAL NOTE RECOVERY
[Dollars in billions]
Scenario
Differences from base
Estate
Base
Severely
adverse
Adverse
Adverse
Severely
adverse
U.S. Central 37 .......................................................................................................
WesCorp ...............................................................................................................
Members ...............................................................................................................
Southwest ..............................................................................................................
Constitution ...........................................................................................................
$0.9
0.9
0.2
0.0
0.0
$0.9
0.5
0.2
0.0
0.0
$0.5
0.3
0.1
0.0
0.0
$0.0
(0.4)
0.0
0.0
0.0
($0.4)
(0.6)
(0.1)
0.0
0.0
Total ...............................................................................................................
2.0
1.6
0.9
(0.4)
(1.1)
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Under the Adverse scenario, NCUA
projects a decline in value of its
receivables from asset management
estates, net of approximately $400
35 Payout
priorities are outlined in 12 CFR 709.5.
more information on the U.S. Central
capital note, see NCUA’s costs and assessments
Q&A (https://www.ncua.gov/Resources/Documents/
QA-Corporate-Resolution-Costs-andAssessments.pdf).
37 These numbers represent both the $0.1 billion
of net receivable due to NCUA and the $0.8 billion
36 For
million, which would equate to a 4basis point reduction in the Share
Insurance Fund’s equity ratio. Under the
Severely Adverse scenario, the potential
decline in value is approximately $1.1
billion or 11 basis points.38
expected to be recognized for the U.S. Central
capital note. While NCUA believes the full $1
billion capital note will be collected, $0.8 billion
represents NCUA’s estimate of the recognizable
value under accounting rules at yearend 2017.
38 There are four asset management estates
projected to have recoveries for investors in
depleted capital instruments of the failed
corporates. Depleted capital recoveries would
decrease by approximately $1.5 billion and $1.7
billion under the Adverse and Severely Adverse
scenarios, respectively. This estimate accounts for
any depleted member capital claims the other four
asset management estates have against the U.S.
Central asset management estate. However, all five
estates are currently expected to have outstanding
Continued
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B. Determining Equity Needed To Cover
Other Risks to the Equity Ratio of the
Share Insurance Fund 39
NCUA uses the relevant variables
from the economic scenarios outlined
above to project the values of the three
primary drivers of the Share Insurance
Fund: Insured share growth, insurance
losses, and yield on investments. NCUA
developed regression equations that
relate the historical movements of
economic variables to movements in
two of the primary drivers of the Share
Insurance Fund equity ratio: Insurance
losses and growth in insured shares.
The equations translate the economic
conditions in the Adverse and Severely
Adverse scenarios into projections of
the level of losses and insured share
growth. The equations are relatively
straightforward and translate economic
federally insured credit unions using
data from 1996 to 2016 for the
unemployment rate and house price
growth.40 As expected, a higher
unemployment rate tends to increase
insurance losses, as does falling house
prices. Then, the dollar value of losses
is projected as a constant percentage of
the portion of shares in CAMEL 4 and
5 rated institutions.
To determine the yield on the Share
Insurance Fund investment portfolio,
interest rate inputs are taken directly
from the Adverse and Severely Adverse
stress scenarios. These inputs are
applied to the Share Insurance Fund’s
investment portfolio assuming a sevenyear ladder.41 Table 7 outlines the
resulting inputs used each year of the
projections for the key drivers to
forecast the equity ratio under the
various stress scenarios.42
developments into Share Insurance
Fund drivers in a commonsense way
using historical data that extends back
to the early-to-mid 1990s. For example,
the equation for share growth relates
annual growth in total shares (inflationadjusted) from 1991 to 2016 to the
unemployment rate, the change in the
average annual unemployment rate, the
change in the average annual threemonth Treasury bill, and the year-toyear growth in real disposable income.
In the equation, a rise in unemployment
first raises share growth, but continued
high unemployment eventually leads to
lower growth. Faster income growth
tends to lead to faster share growth, and
a rising interest rate tends to reduce
share growth.
For the insurance loss equation,
NCUA projects the portion of shares
accounted for by CAMEL 4 and 5 rated
TABLE 7—PROJECTED INPUTS FOR THE PRIMARY DRIVERS OF THE EQUITY RATIO 43
Base
Insured Share Growth ........................................................................................................................................
Insurance Losses (in millions) ...........................................................................................................................
Yield on Investment Portfolio .............................................................................................................................
2017:
2018:
2019:
2020:
2021:
2022:
2017:
2018:
2019:
2020:
2021:
2022:
2017:
2018:
2019:
2020:
2021:
2022:
5.10%
5.30%
5.50%
5.60%
6.00%
5.70%
$52.1
$58.1
$52.4
$60.2
$78.1
$76.7
1.64%
1.92%
2.16%
2.40%
2.57%
2.74%
Adverse
2017:
2018:
2019:
2020:
2021:
2022:
2017:
2018:
2019:
2020:
2021:
2022:
2017:
2018:
2019:
2020:
2021:
2022:
6.60%
6.30%
4.20%
3.70%
3.90%
4.67%
$142.0
$311.2
$257.8
$202.8
$164.2
$188.6
1.56%
1.73%
1.84%
1.93%
2.00%
2.05%
Severely
adverse
2017:
2018:
2019:
2020:
2021:
2022:
2017:
2018:
2019:
2020:
2021:
2022:
2017:
2018:
2019:
2020:
2021:
2022:
6.92%
6.20%
2.34%
1.66%
2.48%
3.90%
$216.0
$532.0
$425.4
$292.4
$230.4
$269.6
1.48%
1.49%
1.47%
1.47%
1.46%
1.51%
mstockstill on DSK30JT082PROD with NOTICES
As shown above, insured share
growth rises initially as consumers
move funds into safer, federally insured
savings instruments—a pattern that is
highly correlated to economic
downturns. After an initial surge,
growth in insured shares slows
reflecting worsening economic
conditions. Toward the end of the stress
scenarios, growth begins to increase
reflecting some rebound in the overall
economy. Insurance losses peak at the
beginning of the economic stress and
then decline and stabilize over the
following years. Overnight rates drop to
10 basis points for the entire period and
the yield on investments drops over the
first three years, and then increases as
the economy begins to recover.
The results of each stress scenario,
expressed as the calendar yearend Share
Insurance Fund equity ratio, are
included in Table 8 (based on the
current equity ratio of 1.26 percent).44
senior creditor obligations, including to the
Stabilization Fund (or Share Insurance Fund after
closure) via the guaranty provided on the NGNs
until 2021. Thus, until senior creditor obligations
can be satisfied with certainty—that is repaid or
fully funded, including for contingencies—it would
be inappropriate for NCUA to make payments to the
subordinated depleted capital claimants.
39 The performance of the Share Insurance Fund
described here does not include the losses
discussed above related to the claims on the
corporate credit union asset management estates.
The Share Insurance Fund performance is modeled
here based on the current financial position,
without factoring in the potential Stabilization
Fund closure.
40 See Letter to Credit Unions 07–CU–12 CAMEL
Rating System for more information on NCUA’s
CAMEL rating system.
41 The interest rate inputs used were provided by
Macroeconomic Advisers, LLC (April 2017). These
inputs were used for two reasons: (1) The Federal
Reserve scenarios do not provide the yield on the
seven-year Treasury note, which NCUA uses in the
stress scenarios. Macroeconomic Advisers uses its
proprietary model to extend the Federal Reserve
scenarios to a wider array of economic variables,
including the full yield curve. (2) Macroeconomic
Advisers advances the beginning of the Federal
Reserve scenarios to the second quarter of 2017,
rather than beginning in the first quarter. This was
necessary because, when conducing analysis of the
Share Insurance Fund, first quarter data was already
known. Macroeconomic Advisers scenarios match
the Federal Reserve scenarios for variables provided
by the Federal Reserve, but the timing is advanced
on quarter into the future relative to the published
Federal Reserve scenarios, so that the Adverse and
Severely Adverse shocks begin in the second
quarter of 2017. Using these scenarios allows NCUA
to implement the full effects of the downturn
scenarios developed by the Federal Reserve.
42 These are stress scenarios and do not represent
forecasts of likely outcomes. Federal Reserve stress
scenarios provide data through the first quarter of
2020. These scenarios are extended through 2021 by
Macroeconomic Advisers, LLC using a proprietary
model. NCUA assumes that values for the economic
variables in 2022 are the same as they were in 2021
(for variables that are rates or growth rates).
43 NCUA used the current budget growth of 4.1
percent in each scenario as the operating expense
input.
44 Using the figures in Table 1 and Table 3 above,
the calendar yearend equity ratio of the Share
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TABLE 8—PROJECTED EQUITY RATIO UNDER VARIOUS ECONOMIC STRESSES 45
2017q1
(%)
Baseline .........................................................
Adverse .........................................................
Severely Adverse ..........................................
2017
(%)
1.26
1.26
1.26
Neither the Adverse nor the Severely
Adverse scenario causes the equity ratio
of the Share Insurance Fund to fall
below 1.00 percent, the level at which
credit union’s contributed capital
deposit would begin to be impaired.46
However, by yearend 2019, under both
the Adverse and Severely Adverse
scenarios, the equity ratio falls below
1.20 percent—the statutory trigger for
either assessing premiums or
developing a Share Insurance Fund
restoration plan. Under the Adverse and
Severely Adverse scenarios, for the
equity ratio to not fall below 1.20
percent during the full projection
timeframe, the equity ratio at yearend
2017 would have to be 1.33 percent and
1.41 percent, respectively.47 However,
the actual results could vary from these
projections based on a variety of factors,
including:
• Projected declines in the equity
ratio, even under no economic stress.
• Extraordinary losses and/or failures
in credit unions that are not market
related, such as those from fraud or
other asset ‘‘bubbles’’.
2018
(%)
1.26
1.25
1.24
2019
(%)
1.24
1.21
1.18
• Unusual or abnormally high
insured share growth materially
different from the historical correlation.
• Economic conditions that involve
greater volatility in one or more market
indicators as compared to the stress
scenarios modeled.
C. Approach for Setting the Normal
Operating Level
The Board has the responsibility to be
prudent in managing the Share
Insurance Fund. In addition to
maintaining public confidence in
federal share insurance, it is important
that NCUA maintain a strong Share
Insurance Fund for the mutual benefit of
the credit union community and the
taxpayers. The Board believes that the
Share Insurance Fund should be able to
withstand a moderate recession without
the equity ratio falling below 1.20
percent. This approach is consistent
with the Act’s minimum equity level for
the Share Insurance Fund set by
Congress. Additionally, it allows NCUA
to maintain a counter-cyclical posture,
which helps to ensure that credit unions
2020
(%)
1.24
1.18
1.13
2021
(%)
1.23
1.16
1.11
2022
(%)
1.23
1.15
1.09
1.23
1.14
1.06
will not need to impair their contributed
capital deposit or pay premiums when
they can least afford it. The Board does
not believe it should set the normal
operating level at a point where
mandatory premiums or development of
a Fund restoration plan would be
necessary in a moderate recession.48
The Board also considered the
amount of equity necessary for the
Share Insurance Fund to withstand a
severe global recession without having
the equity ratio fall below 1.20 percent.
While the Severely Adverse stress
scenario is more conservative, the Board
believes managing to the Adverse
scenario provides a good balance
between maintaining sufficient equity in
the Share Insurance Fund and keeping
money at work in the credit union
community.
Based on the analyses above, Table 9
shows the calculation of what the equity
ratio needs to be to withstand a
moderate and a severe recession without
falling below 1.20 percent.
TABLE 9—EQUITY RATIO NEEDED TO WITHSTAND AN ECONOMIC STRESS BY RISK
Adverse stress
scenario
(%)
Severely
adverse stress
scenario
(%)
Equity for Share Insurance Fund Stress ..................................................................................................................................................
Equity for Claims on AMEs (see Table 6) ................................................................................................................................................
Projected Equity Ratio Decline in 2018 and 2019 (based on current performance trends) 50 ................................................................
49 1.33
0.04
0.02
1.41
0.11
0.02
Total ...................................................................................................................................................................................................
1.39
51 1.54
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To withstand a moderate recession
without the equity ratio falling below
1.20 percent, the Share Insurance
Fund’s equity ratio needs to be high
enough to withstand the following:
• A 13 basis point decline in the
equity ratio due to the impact on the
Insurance Fund is projected to be 1.23 percent, if
the Stabilization Fund is not closed in 2017.
45 These scenarios do not account for any
substantial increase in NCUA’s operating budget or
increases in the loss rate of CAMEL 4 and 5 rated
credit unions, both of which may increase in times
of economic stress.
46 Credit unions’ one percent contributed capital
deposits are included in the numerator of the equity
ratio and are available to absorb losses of the Share
Insurance Fund. However, because the contributed
capital deposits are recorded both as equity to the
Share Insurance Fund and as assets to credit
unions, if NCUA were to use any part of this capital
to absorb losses, credit unions would have to writedown (expense) this asset. At the same time, credit
unions would be required to deposit additional
funds to adjust their contributions back to a full one
percent of their insured shares.
47 Similar results are obtained if the Share
Insurance Fund is stressed over two years using the
highest observed stress factors during the last ten
years.
48 The Board believes its authority to establish a
Fund restoration plan in lieu of mandatory
premiums should only be used for severe,
unexpected circumstances. While the Board can
develop a restoration plan to restore the Share
Insurance Fund to 1.20 percent within eight years
(or longer in extraordinary circumstances), this
could necessitate one or more relatively large
premiums. Further, it could erode public
confidence in federal share insurance.
49 The 2007 Board-approved policy would also
result in a recommended normal operating level
above 1.30 percent. To date, the Board has
maintained the normal operating level at 1.30
percent, which has allowed NCUA to use the excess
equity to help repay outstanding U.S. Treasury
borrowings.
50 The equity ratio has been declining over the
last several years and is expected to continue to
decline because of the low yield on Share Insurance
Fund investments and strong insured share growth.
For additional information on the methodology
used to project the equity ratio using current trends,
refer to the information provided at the November
2016 Open Board Meeting (https://www.ncua.gov/
About/Documents/Agenda%20Items/
AG20161117Item5a.pdf).
51 This exceeds the statutory maximum normal
operating level of 1.50 percent.
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three primary drivers of the Share
Insurance Fund’s performance.
• A 4 basis point decline in the value
of the Share Insurance Fund’s claim on
the corporate credit union asset
management estates.
• A 2 basis point decline in the equity
ratio expected to occur prior to when
the remaining NGNs begin to mature in
2020 and remaining exposure to the
Legacy Assets can begin to be reduced.
This helps ensure the 4 basis points of
additional equity to account for the
potential decline in value of the claims
on the asset management estates is
maintained in the Share Insurance Fund
until Legacy Assets can be sold.52
Therefore, the Board proposes to set
the normal operating level at 1.39
percent. Based on the yearend equity
ratio projections of 1.45 percent to 1.47
percent from Table 3, this would result
in an estimated initial Share Insurance
Fund distribution of 6 to 8 basis points
(approximately $600 to $800 million)
paid in 2018.53
mstockstill on DSK30JT082PROD with NOTICES
Policy for Setting the Normal Operating
Level
The Board retains the authority to
reassess and set the normal operating
level periodically, in particular when
there are changes in the risks to the
Share Insurance Fund’s equity ratio,
such as maturity of the NGNs. Based on
the approach discussed above, the
Board proposes to replace its current
policy for setting the normal operating
level with the following.54
Periodically, NCUA will review the
equity needs of the Share Insurance
Fund and provide this analysis to
stakeholders. Board action is only
necessary when this review determines
that a change in the normal operating
level is warranted. Any change to the
normal operating level of more than 1
basis point shall be made only after a
public announcement of the proposed
52 The Board must consider retaining this equity
now, because as the equity ratio declines, the Board
would be unable to replenish the equity through
premium assessments as long as the equity ratio
remains above 1.30 percent, per the Act. 12 U.S.C.
1782(c)(2)(B).
53 The 4 basis points of equity included for
covering losses on the Share Insurance Fund’s
claims against the corporate asset management
estates, along with any recognition permitted on the
outstanding balance of the $1 billion U.S. Central
capital note (an estimated range of 2 to 5 basis
points of equity), may be available for a future
Share Insurance Fund distribution—provided it is
not consumed by an increase in future legacy asset
losses from an economic downturn or other losses
and factors affecting the equity ratio. Future
distributions also depend on any subsequent
changes the Board might make to the normal
operating level.
54 The current policy was approved at the
December 3, 2007 NCUA Board meeting open to the
public.
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adjustment and opportunity for
comment. In soliciting comment, NCUA
will issue a report including data
supporting the proposal.
The Board’s main objectives in setting
the normal operating level are to:
• Retain public confidence in federal
share insurance,
• Prevent impairment of the one
percent contributed capital deposit, and
• Ensure the Share Insurance Fund
can withstand a moderate recession
without the equity ratio declining below
1.20 percent over a five-year period.
V. Request for Comment
The Board seeks comments on the
proposed closure of the Stabilization
Fund in 2017 and the related approach
for setting the normal operating level of
the Share Insurance Fund. Commenters
are also encouraged to discuss any other
relevant issues they believe the Board
should consider with respect to this
matter. In particular, the Board is
interested in comments on 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, should the Share
Insurance Fund be able 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.
Commenters are encouraged to
provide the specific basis for their
comments and, to the extent feasible,
documentation to support any
recommendations.
By the National Credit Union
Administration Board on July 20, 2017.
Gerard S. Poliquin,
Secretary of the Board.
[FR Doc. 2017–15686 Filed 7–26–17; 8:45 am]
BILLING CODE 7535–01–P
NUCLEAR REGULATORY
COMMISSION
[Docket Nos. 52–027 and 52–028; NRC–
2008–0441]
South Carolina Electric & Gas
Company, South Carolina Public
Service Authority; Virgil C. Summer
Nuclear Station, Units 2 and 3,
Inspections, Tests, Analyses, and
Acceptance Criteria
Nuclear Regulatory
Commission.
AGENCY:
PO 00000
Frm 00068
Fmt 4703
Sfmt 4703
Determination of the successful
completion of inspections, tests, and
analyses.
ACTION:
The U.S. Nuclear Regulatory
Commission (NRC) has determined that
the inspections, tests, and analyses have
been successfully completed, and that
the specified acceptance criteria are met
for the Virgil C. Summer Nuclear
Station (VCSNS), Units 2 and 3.
DATES: The determination of the
successful completion of inspections,
tests, and analyses for VCSNS Units 2
and 3 is effective July 27, 2017.
ADDRESSES: Please refer to Docket ID
NRC–2008–0441 when contacting the
NRC about the availability of
information regarding this document.
You may obtain publicly-available
information related to this document
using any of the following methods:
• Federal Rulemaking Web site: Go to
https://www.regulations.gov and search
for Docket ID NRC–2008–0441. Address
questions about NRC dockets to Carol
Gallagher; telephone: 301–415–3463;
email: Carol.Gallagher@nrc.gov. For
technical questions, contact the
individual listed in the FOR FURTHER
INFORMATION CONTACT section of this
document.
• NRC’s Agencywide Documents
Access and Management System
(ADAMS): You may obtain publiclyavailable documents online in the
ADAMS Public Documents collection at
https://www.nrc.gov/reading-rm/
adams.html. To begin the search, select
‘‘ADAMS Public Documents’’ and then
select ‘‘Begin Web-based ADAMS
Search.’’ For problems with ADAMS,
please contact the NRC’s Public
Document Room (PDR) reference staff at
1–800–397–4209, 301–415–4737, or by
email to pdr.resource@nrc.gov. The
ADAMS accession number for each
document referenced (if it is available in
ADAMS) is provided the first time that
it is mentioned in this document.
• NRC’s PDR: You may examine and
purchase copies of public documents at
the NRC’s PDR, Room O1–F21, One
White Flint North, 11555 Rockville
Pike, Rockville, Maryland 20852.
FOR FURTHER INFORMATION CONTACT:
Billy Gleaves, Office of New Reactors,
U.S. Nuclear Regulatory Commission,
Washington, DC 20555–0001; telephone:
301–415–5848; email: Bill.Gleaves@
nrc.gov.
SUMMARY:
SUPPLEMENTARY INFORMATION:
I. Licensee Notification of Completion
of ITAAC
South Carolina Electric & Gas
(SCE&G), on behalf of itself and the
South Carolina Public Service
E:\FR\FM\27JYN1.SGM
27JYN1
Agencies
[Federal Register Volume 82, Number 143 (Thursday, July 27, 2017)]
[Notices]
[Pages 34982-34990]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2017-15686]
=======================================================================
-----------------------------------------------------------------------
NATIONAL CREDIT UNION ADMINISTRATION
Closing the Temporary Corporate Credit Union Stabilization Fund
and Setting the Share Insurance Fund Normal Operating Level
AGENCY: National Credit Union Administration (NCUA).
ACTION: Notice and request for comment.
-----------------------------------------------------------------------
SUMMARY: The NCUA Board (Board) is considering closing the Temporary
Corporate Credit Union Stabilization Fund (Stabilization Fund) in 2017,
prior to its scheduled closing date in June 2021. Closing the
Stabilization Fund and distributing all assets, property, and funds to
the National Credit Union Share Insurance Fund (Share Insurance Fund)
will increase the Share Insurance Fund's equity ratio and allow for the
return to insured credit unions of any equity above the normal
operating level. The return of excess equity would be accomplished
through a distribution from the Share Insurance Fund in conformance
with the Federal Credit Union Act (the Act). 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. Therefore, the Share Insurance Fund would need to hold
sufficient equity to cover potential changes in the value of its claims
on the failed corporate credit union asset management estates. In
addition, the Share Insurance Fund needs to have enough equity to cover
other risks to the equity ratio, such as losses on insured credit
unions, under the same macroeconomic conditions that create volatility
in the asset management estate values. To ensure the Share Insurance
Fund has sufficient equity to absorb these risks, the Board proposes to
raise the normal operating level to 1.39 percent.
This notice provides a discussion of the reasons the Board is
proposing to close the Stabilization Fund in 2017 and the basis used to
determine the normal operating level necessary to account for the
additional risk to the Share Insurance Fund. In addition, the notice
sets forth a new policy by which the Board would set the normal
operating level. The Board solicits comments on each of these proposed
actions.
DATES: Comments must be received on or before September 5, 2017 to be
assured of consideration.
ADDRESSES: You may submit comments by any of the following methods
(Please send comments by one method only):
NCUA Web site: https://www.ncua.gov/about/pages/board-comments.aspx
Email: Address to boardcomments@ncua.gov. Include ``[Your
name]--Comments on Stabilization Fund Closure'' in the email subject
line.
Fax: (703) 518-6319. Use the subject line described above
for email.
Mail: Address to Gerald Poliquin, Secretary of the Board,
National Credit Union Administration, 1775 Duke Street, Alexandria, VA
22314-3428.
Hand Delivery/Courier: Same as mail address.
Public Inspection: You can view all public comments on NCUA's Web
site at https://www.ncua.gov/about/pages/board-comments.aspx as
submitted, except for those we cannot post for technical reasons. NCUA
will not edit or remove any identifying or contact information from the
public comments submitted. You may inspect paper copies of comments in
NCUA's headquarters at 1775 Duke Street, Alexandria, VA 22314, by
appointment weekdays between 9 a.m. and 3 p.m. To make an appointment,
call (703) 518-6360 or send an email to EIMail@ncua.gov.
FOR FURTHER INFORMATION CONTACT: Anthony Cappetta, Supervisory
Financial Analyst, at 1775 Duke Street, Alexandria, VA 22314, or
telephone: (703) 518-1592.
SUPPLEMENTARY INFORMATION:
I. Stabilization Fund Background
II. Legal Matters
III. Closing the Stabilization Fund
IV. The Normal Operating Level
V. Request for Comment
I. Stabilization Fund Background
Public Law 111-22, Helping Families Save Their Homes Act of 2009
(Helping Families Act), signed into law by the President on May 20,
2009 created the Temporary Corporate Credit Union Stabilization Fund.
Congress provided NCUA with this temporary fund to accrue the losses of
the corporate credit union system and assess insured credit unions for
such losses over time. This prevented insured credit unions from
bearing a significant burden for losses associated with the failure of
five corporate credit unions within a short period. Without creation of
the Stabilization Fund, these corporate credit union losses would have
been borne by the Share Insurance Fund. The magnitude of losses would
have exhausted the Share Insurance Fund's retained earnings and
significantly impaired credit unions' one percent contributed capital
deposit.\1\ The deposit impairment, along with premiums that would have
been necessary to restore the Share Insurance Fund's equity ratio,
would have resulted in a significant, immediate cost to credit unions
at a time when their earnings and capital were already under stress due
to the Great Recession.\2\ In June 2009, the Board formally approved
use of the Stabilization Fund for accounting for the costs of the
Corporate System Resolution Program.\3\ Since then, all of these costs
have been accounted for in the financial statements of the
Stabilization Fund.
---------------------------------------------------------------------------
\1\ Prior to reassignment of these costs to the Stabilization
Fund, the capitalization deposit impairment would have been 89 basis
points.
\2\ Because the contributed capital deposit is reflected as an
asset on the financial statements of insured credit unions, under
accounting rules any impairment results in an immediate expense to
credit unions.
\3\ For more details on the corporate system resolution program,
please see the NCUA Corporate System Resolution Costs Web page
(https://www.ncua.gov/regulation-supervision/Pages/corporate-system-resolution.aspx).
---------------------------------------------------------------------------
The Act specifies that the Stabilization Fund will terminate 90
days after the seven-year anniversary of its first borrowing from the
U.S. Treasury.\4\ The first borrowing occurred
[[Page 34983]]
on June 25, 2009, making the original closing date September 27, 2016.
However, the Act provided the Board, with the concurrence of the
Secretary of the U.S. Treasury, authority to extend the closing date of
the Stabilization Fund. In June 2010, the Board voted to extend the
life of the Stabilization Fund and on September 24, 2010, NCUA received
concurrence from the Secretary of the U.S. Treasury to extend the
closing date to June 30, 2021.
---------------------------------------------------------------------------
\4\ 12 U.S.C. 1790e(h).
---------------------------------------------------------------------------
In March 2009, the Board conserved U.S. Central Federal Credit
Union and Western Corporate Credit Union. In September 2010, the Board
conserved three additional corporate credit unions and publicly
announced the Corporate System Resolution Program. The Board placed the
five corporate credit unions into liquidation in the fourth quarter of
2010. The Board, as Liquidating Agent, administers the assets and
liabilities of the five failed corporate credit unions in separate
legal entities, referred to as asset management estates.
The Corporate System Resolution Program included providing 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 the Legacy Assets) held by the liquidated corporate
credit unions. Under the Corporate System Resolution Program, NCUA
created a re-securitization program where NCUA issued a series of NCUA
Guaranteed Notes (NGNs). The sale of NGNs to investors has provided
long-term funding for the Legacy Assets. The NGNs are guaranteed by
NCUA in its Agency capacity, backed by the full faith and credit of the
United States. While the accounting for obligations associated with the
NGNs occurs through the Stabilization Fund, the guaranty is not
specific to the Stabilization Fund. All NCUA agency funds for which
payments on the NGN guarantees is a permitted use, including the Share
Insurance Fund, are potential sources for guaranty obligations prior to
any recourse to the U.S. Treasury.
During its life, the Stabilization Fund provides the primary
funding necessary for NCUA's guarantees on the NGNs and to complete the
resolution of the corporate credit union asset management estates. The
majority of this funding has been from two primary sources: Borrowings
of $5.1 billion (peak outstanding balance) on NCUA's $6 billion line of
credit with the U.S. Treasury and $4.8 billion in Stabilization Fund
assessments paid by insured credit unions.
In 2010, when NCUA announced the Corporate System Resolution
Program, the outstanding principal balance of the Legacy Assets totaled
over $40 billion--about four times the size of the Share Insurance
Fund. The initial outstanding balance of guaranteed notes backed by the
Legacy Assets and sold to investors through the NGN program in 2010 and
2011 totaled approximately $28 billion--almost three times the size of
the Share Insurance Fund at that time. As of March 2017, the
outstanding principal balance of the Legacy Assets and the outstanding
balance of the guaranteed notes back by them have declined to $12.7
billion and $7.5 billion, respectively. Both of these balances are less
than the current size of the Share Insurance Fund, which is $13.2
billion in total assets as of March 31, 2017.
The projected range of lifetime Legacy Asset defaults was $13.2
billion to $16.4 billion as of December 2011. As of March 2017, the
projected range of lifetime Legacy Asset defaults has declined to $9.9
billion to $10.3 billion. In addition, NCUA's pursuit of legal
recoveries in its capacity as Liquidating Agent against various third
parties in connection with the Legacy Assets has resulted in net
recoveries of approximately $3.8 billion after fees and expenses.\5\
Improved projected performance of the Legacy Assets and legal
recoveries are the primary reasons the Stabilization Fund's net
position has increased from negative $7.5 billion as of December 2010
to a positive $1.6 billion as of March 2017.
---------------------------------------------------------------------------
\5\ NCUA does not include potential future legal recoveries in
loss projections, as they are inherently inestimable. For a list of
legal recoveries to date, see NCUA's Legal Recoveries Web site
(https://www.ncua.gov/regulation-supervision/Pages/corporate-system-resolution/legal-recoveries.aspx).
---------------------------------------------------------------------------
It is now possible for the remaining obligations of the Corporate
System Resolution Program to be borne by the Share Insurance Fund
without inordinate risk, provided additional equity is maintained while
the exposure to remaining resolution program obligations exist. As a
result, the Board believes the purpose of the Stabilization Fund has
been fulfilled.\6\ Therefore, the Board proposes to close the
Stabilization Fund in 2017. Closing the Stabilization Fund at this time
would increase the equity ratio of the Share Insurance Fund and require
NCUA to distribute any resulting equity above the normal operating
level to insured credit unions.\7\ The Board is simultaneously
publishing a separate proposal to update Sec. 741.4 of NCUA's Rules
and Regulations regarding the method for Share Insurance Fund
distributions to insured credit unions.
---------------------------------------------------------------------------
\6\ Worthy of note, if the Stabilization Fund is closed in 2017,
it would have been in operation about one year longer than the
original seven years provided for in the Act.
\7\ The potential return of excess equity would be in the form
of a distribution to insured credit unions from the Share Insurance
Fund as provided for in the Act. Stakeholders should not confuse
this with potential recoveries on depleted member capital. Until
senior obligations of each particular estate can be satisfied, there
will not be distributions for any recoveries on depleted member
capital.
---------------------------------------------------------------------------
II. Legal Matters
The Act sets forth the purpose, permissible expenditures, borrowing
and repayment authorities, assessment authority, investment authority,
and procedures for closing the Stabilization Fund.\8\ The statute
specifically prescribes the conditions for closing the Stabilization
Fund and distributing its holdings.\9\ The Board has the authority
under the Act to close the Stabilization Fund at its discretion at any
time when it has no deficit, which then requires that all of its assets
and funds be distributed to the Share Insurance Fund.\10\ The
Stabilization Fund's financial statements have reflected a positive net
position since June 30, 2014. Therefore, there are currently no
statutory barriers for the Board in regards to closing the
Stabilization Fund in 2017. Once the Stabilization Fund is closed,
there is no statutory authority that permits NCUA to re-open it for any
reason.
---------------------------------------------------------------------------
\8\ 12 U.S.C. 1790e.
\9\ 12 U.S.C. 1790e(h).
\10\ 12 U.S.C. 1790e(g), (h).
---------------------------------------------------------------------------
The Board is aware of industry opinions that the Act may permit a
distribution to insured credit unions directly from the Stabilization
Fund. The Board does not believe this is permissible for the following
reasons.
NCUA's authority to use Stabilization Fund money arises from the
reference to 12 U.S.C. 1783(a) in the legislation that created the
Stabilization Fund.\11\ Specifically, the legislation provides that
``[m]oney in the Stabilization Fund shall be available upon requisition
by the Board . . . for making payments for the purposes described in
Sec. 1783(a) of this title.'' \12\ Except with respect to
administrative payments, the legislation limits this authority to the
context of a ``conservatorship, liquidation, or threatened
conservatorship or liquidation, of a corporate credit union.'' \13\
Under section 1783(a),
[[Page 34984]]
permissible uses include payments of insurance under section 1787 of
the title, for providing assistance and making expenditures under
section 1788 of the title in connection with the liquidation or
threatened liquidation of insured credit unions, and for such
administrative and other expenses incurred in carrying out the purposes
of the subchapter as the Board may determine to be proper.
---------------------------------------------------------------------------
\11\ 12 U.S.C. 1790e(b).
\12\ 12 U.S.C. 1790e(b)(1).
\13\ Id.
---------------------------------------------------------------------------
Here, a distribution, such as an assessment rebate, does not
plainly meet any of those criteria, assuming an appropriate nexus to a
corporate credit union conservatorship or liquidation could be
established in each instance. First, a distribution to insured credit
unions from the Stabilization Fund, by its namesake alone, would not be
a payment of insurance under section 1787. Further, a distribution
could not be in the form of assistance under section 1788, since it
would not go to credit unions for the assistance purposes described in
section 1788. Finally, a distribution is not an ``administrative
expense'' or ``other expense'' in the context of the Act.
While the general definition of an expense can be quite broad,\14\
section 1782(c)(3) of the Act expressly governs distributions to
insured credit unions. Distributions under section 1782(c)(3) are not
included as an authority that Congress granted for the Stabilization
Fund, particularly since Congress expressly tied Stabilization Fund
authority to section 1783(a), to the exclusion of any other section. On
the contrary, the Stabilization Fund legislation references section
1782(c)(3) only with respect to distributions flowing into the
Stabilization Fund, in any circumstances where U.S. Treasury borrowings
remain outstanding.\15\
---------------------------------------------------------------------------
\14\ Black's Law Dictionary characterizes an expense as ``[a]n
expenditure of money, time, labor or resources to accomplish a
result.'' Black's Law Dictionary 617 (8th ed. 2004).
\15\ 12 U.S.C. 1790e(e).
---------------------------------------------------------------------------
In the only other circumstance where the legislation references a
distribution in any manner, it is in reference to the Stabilization
Fund's closing.\16\ In that circumstance, the Act limits a distribution
of all ``funds, property or other assets remaining in the Stabilization
Fund'' to one recipient: The Share Insurance Fund.\17\ For these
reasons, the Board believes the Stabilization Fund must be closed
before a distribution of excess funds to insured credit unions can
occur for purposes other than those described in section 1783(a).
---------------------------------------------------------------------------
\16\ 12 U.S.C. 1790e(h).
\17\ Id. Within 90 days following the seventh anniversary of the
initial Stabilization Fund advance, or earlier at the Board's
discretion, the Board shall distribute any funds, property, or other
assets remaining in the Stabilization Fund to the Insurance Fund and
shall close the Stabilization Fund.
---------------------------------------------------------------------------
III. Closing the Stabilization Fund
A. Accounting and Financial Reporting
The financial statements of the Stabilization Fund and the Share
Insurance Fund are presented under standards promulgated by the Federal
Accounting Standards Advisory Board (FASAB). These financial statements
are presented and audited by calendar year. With the closing of the
Stabilization Fund, NCUA intends to prepare final financial statements
for the Stabilization Fund as of September 30, 2017. These financial
statements would be audited by NCUA's Office of the Inspector General.
Per applicable accounting standards, the assets and liabilities of
the Stabilization Fund will be distributed to the Share Insurance Fund
at September 30, 2017 values. This transfer will increase the net
position of the Share Insurance Fund, resulting in an increase to the
equity ratio. As required by applicable accounting standards, certain
budgetary accounts will also transfer and be shown in the Statement of
Budgetary Resources. NCUA determined the applicable accounting
standards in consultation with an independent accounting firm.
The post-closure financial statements and note disclosures for the
Share Insurance Fund will continue to provide the same level of detail
about the receivables from the corporate asset management estates and
the related fiduciary activities. That is, the detailed note
disclosures in the Stabilization Fund's financial statements will now
be in the note disclosures of the Share Insurance Fund's financial
statements. NCUA does not envision any changes to the accounting for
the asset management estates. The accounting for each asset management
estate has and will remain distinct, which is a requisite in fulfilling
the Board's responsibility as Liquidating Agent.
For illustrative purposes, Table 1 depicts the March 31, 2017 Share
Insurance Fund balance sheet (unaudited), the March 31, 2017
Stabilization Fund balance sheet (unaudited), and the pro-forma Share
Insurance Fund balance sheet (unaudited) as if the Stabilization Fund
were closed on that day.\18\
---------------------------------------------------------------------------
\18\ The impact on the post-closure Share Insurance Fund
financial statements will be based on actual results at the time the
Stabilization Fund is closed and the presentation may vary somewhat
due to the specific application of accounting standards on
individual line items.
Table 1--Share Insurance Fund and Stabilization Fund Balance Sheets, Pre- and Post-Closure, as of March 31, 2017
[Dollars in millions]
----------------------------------------------------------------------------------------------------------------
Share Share
insurance Stabilization insurance
fund (pre- fund (pre- fund (post-
closure) closure) closure)
----------------------------------------------------------------------------------------------------------------
Assets
----------------------------------------------------------------------------------------------------------------
Fund Balance with Treasury & Investments........................ $12,766.2 $700.4 $13,466.6
Notes Receivable, Net........................................... 8.7 .............. 8.7
Capitalization Deposits Receivable.............................. 316.5 .............. 316.5
Receivable from Asset Management Estates, Net (NPCU)............ 51.3 .............. 51.3
Receivable from Asset Management Estates, Net (CCU)............. .............. 876.3 876.3
Accrued Interest and Other Assets............................... 61.2 2.7 63.9
-----------------------------------------------
Total Assets................................................ 13,203.9 1,579.4 14,783.3
----------------------------------------------------------------------------------------------------------------
Liabilities and Net Position
----------------------------------------------------------------------------------------------------------------
Accounts Payable and Other Liabilities.......................... 26.0 1.1 27.1
Borrowings from U.S. Treasury................................... .............. .............. ..............
Insurance and Guarantee Program Liabilities..................... 245.6 .............. 245.6
Net Position--Contributed Capital Deposits...................... 10,285.8 .............. 10,258.8
[[Page 34985]]
Net Position--Cumulative Results of Operations.................. 2,646.5 1,578.3 4,224.8
-----------------------------------------------
Total Liabilities and Net Position.......................... 13,203.9 1,579.4 14,783.3
-----------------------------------------------
Total Net Position...................................... 12,932.3 1,578.3 14,510.6
----------------------------------------------------------------------------------------------------------------
Subsequent to March 31, 2017, and prior to the end of the year,
there are several items that have been or are expected to be recognized
that will ultimately affect the net position of the Share Insurance
Fund. Table 2 includes these additional items and the effect on the
projected net position as of December 31, 2017.
Table 2--Breakdown of Projected Net Position Components by December 31,
2017
[Dollars in thousands]
------------------------------------------------------------------------
Amount (in
Component millions)
------------------------------------------------------------------------
March 31, 2017 Pro-Forma Net Position (Post-Closure)-- $14,511
From Table 1 Above...................................
Plus: Legal Recoveries that Increase the Value of 310
the Receivable from the AMEs.....................
Plus: Estimated Recovery on U.S. Central Capital \20\ 500-800
Note \19\........................................
Plus: Share Insurance Fund Net Income 2017q2- (26)
2017q4 \21\......................................
Plus: Adjustment to 1% Contributed Capital Deposit 383
\22\.............................................
-----------------
Equals: Adjusted Net Position (Post-Closure), as of 12/ 15,678-15,978
31/17................................................
------------------------------------------------------------------------
B. Effect on Share Insurance Fund Equity Ratio and Distributions
---------------------------------------------------------------------------
\19\ The estimated recovery includes U.S. Central's portion of
the recent legal recoveries.
---------------------------------------------------------------------------
The Share Insurance Fund equity ratio is defined in the Act as the
ratio of the amount of Fund capitalization, including insured credit
unions' 1 percent capitalization deposits and the retained earnings
balance of the Fund (net of direct liabilities of the fund and
contingent liabilities for which no provision has been made) to the
aggregate amount of insured shares in all insured credit unions.\23\ It
serves as a measure of the Share Insurance Fund's overall strength and
ability to absorb losses. In general, the Act requires the Board to
manage the Share Insurance Fund's equity ratio within a range of 1.20
percent to 1.50 percent.
---------------------------------------------------------------------------
\20\ This estimated range only reflects what is projected to be
recognizable by December 31, 2017 under applicable accounting rules,
which mainly includes the portion of the U.S. Central capital note
for which there is cash available for repayment.
\21\ Assuming current yield on investments, insurance losses
equal to the five-year average, and operating expenses based on the
currently approved NCUA budget.
\22\ Based on share growth of 3.71 percent in the first quarter
2017 and the historical share of adjusted contributed capital
deposit adjustments collected in October each year.
\23\ 12 U.S.C. 1782(h)(2).
---------------------------------------------------------------------------
The closure of the Stabilization Fund would increase the Share
Insurance Fund's net position. This would result in an increase to the
Share Insurance Fund's equity ratio. Table 3 shows the estimated equity
ratio of the Share Insurance Fund as of December 31, 2017 as if the
Stabilization Fund were closed.
Table 3--Projected Share Insurance Fund Equity Ratio as of December 31,
2017
[Dollars in thousands]
------------------------------------------------------------------------
Amount (in
Component millions)
------------------------------------------------------------------------
Adjusted Net Position Post Closure--From Table 2 Above $15,678-$15,978
Less: Gain(Loss) on Investments \24\................ ($66)
-----------------
Equals: Equity Ratio Numerator........................ $15,744-$16,044
Equity Ratio Denominator: Projected Insured Shares as $1,089,500
of December 31, 2017 \25\............................
Projected Calendar Yearend 2017 Equity Ratio \26\..... 1.45%-1.47%
------------------------------------------------------------------------
The Share Insurance Fund's calendar yearend equity ratio is part of
the statutory basis to determine whether NCUA must make a distribution
to insured credit unions.\27\ The Act states ``the Board shall effect a
pro rata distribution to insured credit unions after each calendar year
if, as of the end of that calendar year--
---------------------------------------------------------------------------
\24\ Actual gain(loss) on investments as of March 31, 2017 and
could be materially different as of December 31, 2017.
\25\ Based on 5.8 percent annual insured share growth, which is
the three-year average insured share growth for the industry.
\26\ This does not account for extraordinary losses and/or
failures in credit unions, abnormally high insured-share growth, or
a significant downturn in economic conditions, including declining
interest rates.
\27\ The equity ratio is also part of the statutory basis for
determining whether a premium or Share Insurance Fund restoration
plan is necessary.
---------------------------------------------------------------------------
[[Page 34986]]
Any loans to the Fund from the Federal Government, and any
interest on those loans, have been repaid;
The Fund's equity ratio exceeds the normal operating
level; and
The Fund's available assets ratio exceeds 1.0 percent.''
\28\
---------------------------------------------------------------------------
\28\ 12 U.S.C. 1782(c)(3). This section is also subject to 12
U.S.C. 1790e(e).
---------------------------------------------------------------------------
As of October 24, 2016, all NCUA borrowings from the Federal
Government had been repaid. The Share Insurance Fund's available asset
ratio is 1.21 percent as of March 31, 2017, well above the 1.0 percent
minimum and is projected to remain above 1.0 percent.\29\
---------------------------------------------------------------------------
\29\ After closure, NCUA estimates the Share Insurance Fund
would hold $4 billion in surplus funds over the 1.0 percent minimum
ratio. NCUA currently projects $2.8 billion in guaranty payments on
the NGNs after 2017. However, the current estimate for the funding
needs net of related cash flows is approximately $1 billion.
---------------------------------------------------------------------------
To the extent the equity ratio exceeds the normal operating level
as of calendar yearend 2017, a distribution would be paid to insured
credit unions in accordance with the Act and Sec. 741.4 of NCUA
regulations. The distribution in total would equal the dollar amount of
equity in excess of the normal operating level. For additional
information on how the pro rata distribution would be made, see the
July 2017 Notice of Proposed Rulemaking on this subject.
IV. The Normal Operating Level
Per the Act, the normal operating level is an equity ratio set by
the Board and may not be less than 1.20 percent and not more than 1.50
percent.\30\ As noted above, if the calendar yearend equity ratio
exceeds the normal operating level, NCUA is required to make a pro rata
distribution to insured credit unions. The Board has historically set
the normal operating level as the target equity ratio for the Share
Insurance Fund.
---------------------------------------------------------------------------
\30\ 12 U.S.C. 1782(h)(4).
---------------------------------------------------------------------------
The current normal operating level is 1.30 percent, set by the
Board in 2007 based on the Board-approved methodology in place at that
time. When establishing the 1.30 percent normal operating level in
2007, the Board affirmed that the Share Insurance Fund would maintain a
counter-cyclical posture. In practice, this means the Share Insurance
Fund's equity should be built up during periods of economic prosperity
and allowed to decline during periods of economic adversity. A counter-
cyclical posture allows NCUA to maintain the Share Insurance Fund at a
level that is sufficient for it to remain viable even during economic
stress conditions without having to charge a premium when credit unions
can least afford it.
With the proposed closing of the Stabilization Fund, the Board
considered whether the current normal operating level of 1.30 percent
would be sufficient to cover all of the Share Insurance Fund's
resulting exposures. To determine this, NCUA modeled the losses that
would be expected under a moderate and a severe recession.\31\ For the
two recession scenarios, the agency modeled the:
---------------------------------------------------------------------------
\31\ In estimating the equity ratio under various economic
stress scenarios, NCUA must make estimates and assumptions that
affect the model output. Actual results could differ from NCUA's
estimates; however, the agency evaluates the reasonableness of such
estimates when analyzing the model output. The base scenario for
modeling the performance of the Share Insurance Fund is a moderate
economic expansion through the projection period with Treasury rates
assumed to rise steadily across the maturity spectrum, the
unemployment rate remains low and housing prices rise slightly.
---------------------------------------------------------------------------
Impact on the equity ratio of the estimated decline in the
value of the Share Insurance Fund's claims on the liquidated corporate
credit unions' asset management estates--which would be driven by a
reduction in the value of the Legacy Assets.
Performance of the Share Insurance Fund based on the three
primary factors that currently affect the Share Insurance Fund's equity
ratio: Insured share growth, yield on investments, and insurance
losses.
The Share Insurance Fund was modeled over a five-year period and
the Legacy Assets were modeled over their remaining life.\32\ NCUA used
the applicable variables describing economic developments for the
Adverse and Severely Adverse economic scenarios from the Federal
Reserve Board's 2017 annual stress test supervisory scenarios.\33\ In
the Adverse scenario, the U.S. economy experiences a moderate
recession, and asset prices decline. This scenario is characterized by
weakening economic activity, including higher unemployment, falling
short-term interest rates, long-term interest rates that slowly rise, a
steadily rising unemployment rate, and sustained declines in housing
prices. The Severely Adverse scenario is characterized by a severe
global recession that is accompanied by a period of heightened stress
in corporate loan markets and commercial real estate markets. In this
scenario, the unemployment rate spikes, short-term interest rates fall
to near zero, long-term interest rates fall initially then increase
slightly, and housing prices decline substantially. Further details on
how these scenarios were applied to model the value of the claims on
the corporate asset management estates and the performance of the Share
Insurance Fund are provided below.
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\32\ A five-year horizon (beginning at yearend 2017) was used to
cover the cycle of an economic downturn and the life of the NGN
program.
\33\ Supervisory Scenarios for Annual Stress Test Required under
the Dodd-Frank Act Stress Testing Rules and the Capital Plan Rule,
February 10, 2017 (https://www.federalreserve.gov/newsevents/pressreleases/files/bcreg20170203a5.pdf).
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A. Determining Equity Needed To Cover Potential Declines in the Value
of Claims on the Corporate Credit Union Asset Management Estates
At NCUA's request, BlackRock incorporated the Adverse and Severely
Adverse macroeconomic scenarios into its proprietary models to project
cash flows for all of the Legacy Assets.\34\ In both the Adverse and
Severely Adverse macroeconomic scenarios, the value of the Legacy
Assets declines.
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\34\ The NGNs remaining after yearend 2017 do not mature until
2020 and 2021. Because these NGNs do not have a call feature (other
than a clean-up call provision when the Legacy Asset balances are 10
percent or less or their balances when transferred to the NGNs,
which NCUA does not expect to be triggered), they cannot be retired
early.
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Credit spreads indicative of Adverse and Severely Adverse market
conditions are applied to the forward interest rate curve to arrive at
a discount rate to calculate the present value of the Legacy Asset cash
flows, as shown in Table 4. For the Adverse scenario, credit spreads
similar to the period of the U.S. credit rating downgrade in August
2011 were used. For the Severely Adverse scenario, credit spreads
similar to the peak of the Great Recession in 2009 were used.
[[Page 34987]]
Table 4--Discounted Legacy Asset Cash Flows
[Dollars in billions]
--------------------------------------------------------------------------------------------------------------------------------------------------------
Scenario Differences from base
------------------------------------------------------------------------------------
Severely Severely
Base Adverse adverse Adverse adverse
--------------------------------------------------------------------------------------------------------------------------------------------------------
Total.............................................................. $10.3 $8.3 $7.3 ($2.0) ($3.0)
--------------------------------------------------------------------------------------------------------------------------------------------------------
The projected Legacy Asset cash flows are aggregated by NGN and run
through the applicable NGN waterfall to determine their related
projected cash flows. As shown in Table 5, the NGN-related cash flows
include guaranty fees paid to NCUA, guaranty payments made by NCUA to
NGN investors for principal and interest shortfalls, guaranty
reimbursements made to NCUA for any guaranty payments made, and any
residual cash flows left after all of these payments have been made.
The present value of the NGN cash flows is determined by the same
discounting approach discussed above.
Table 5--Discounted NGN Cash Flows
[Dollars in billions]
----------------------------------------------------------------------------------------------------------------
Scenario Differences from base
-------------------------------------------------------------------------------
Cash flow Severely Severely
Base Adverse adverse Adverse adverse
----------------------------------------------------------------------------------------------------------------
Guaranty Fees................... $0.1 $0.1 $0.1 $0.0 $0.0
Guaranty Payments............... (3.2) (4.0) (4.4) (0.8) (1.2)
Guaranty Reimbursements......... 3.0 3.3 3.5 0.3 0.5
Residuals....................... 3.5 2.1 1.3 (1.4) (2.2)
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Total....................... 3.4 1.5 0.5 (1.9) (2.9)
----------------------------------------------------------------------------------------------------------------
NCUA then applied the un-securitized projected Legacy Asset cash
flows and NGN cash flows to the applicable asset management estates
based on the payout priorities in NCUA regulations.\35\ This results in
an estimate of the change in the net receivable from asset management
estates due to NCUA, as well as changes in NCUA's projected recovery on
the U.S. Central capital note.\36\ For each asset management estate,
the impact of the stress scenarios will differ depending on the
specific circumstances of the estate. While the decreases in Legacy
Asset and NGN cash flows under the Adverse and Severely Adverse
scenarios are approximately $2 billion and $3 billion, respectively,
the net impact on the value of NCUA's claims--and ultimately the equity
ratio--is different, primarily due to how these funds flow through the
payout priorities applicable to each asset management estate. This is
shown in Table 6.
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\35\ Payout priorities are outlined in 12 CFR 709.5.
\36\ For more information on the U.S. Central capital note, see
NCUA's costs and assessments Q&A (https://www.ncua.gov/Resources/Documents/QA-Corporate-Resolution-Costs-and-Assessments.pdf).
\37\ These numbers represent both the $0.1 billion of net
receivable due to NCUA and the $0.8 billion expected to be
recognized for the U.S. Central capital note. While NCUA believes
the full $1 billion capital note will be collected, $0.8 billion
represents NCUA's estimate of the recognizable value under
accounting rules at yearend 2017.
Table 6--Net Receivable to NCUA Plus U.S. Central Capital Note Recovery
[Dollars in billions]
----------------------------------------------------------------------------------------------------------------
Scenario Differences from base
-------------------------------------------------------------------------------
Estate Severely Severely
Base Adverse adverse Adverse adverse
----------------------------------------------------------------------------------------------------------------
U.S. Central \37\............... $0.9 $0.9 $0.5 $0.0 ($0.4)
WesCorp......................... 0.9 0.5 0.3 (0.4) (0.6)
Members......................... 0.2 0.2 0.1 0.0 (0.1)
Southwest....................... 0.0 0.0 0.0 0.0 0.0
Constitution.................... 0.0 0.0 0.0 0.0 0.0
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Total....................... 2.0 1.6 0.9 (0.4) (1.1)
----------------------------------------------------------------------------------------------------------------
Under the Adverse scenario, NCUA projects a decline in value of its
receivables from asset management estates, net of approximately $400
million, which would equate to a 4-basis point reduction in the Share
Insurance Fund's equity ratio. Under the Severely Adverse scenario, the
potential decline in value is approximately $1.1 billion or 11 basis
points.\38\
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\38\ There are four asset management estates projected to have
recoveries for investors in depleted capital instruments of the
failed corporates. Depleted capital recoveries would decrease by
approximately $1.5 billion and $1.7 billion under the Adverse and
Severely Adverse scenarios, respectively. This estimate accounts for
any depleted member capital claims the other four asset management
estates have against the U.S. Central asset management estate.
However, all five estates are currently expected to have outstanding
senior creditor obligations, including to the Stabilization Fund (or
Share Insurance Fund after closure) via the guaranty provided on the
NGNs until 2021. Thus, until senior creditor obligations can be
satisfied with certainty--that is repaid or fully funded, including
for contingencies--it would be inappropriate for NCUA to make
payments to the subordinated depleted capital claimants.
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[[Page 34988]]
B. Determining Equity Needed To Cover Other Risks to the Equity Ratio
of the Share Insurance Fund 39
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\39\ The performance of the Share Insurance Fund described here
does not include the losses discussed above related to the claims on
the corporate credit union asset management estates. The Share
Insurance Fund performance is modeled here based on the current
financial position, without factoring in the potential Stabilization
Fund closure.
---------------------------------------------------------------------------
NCUA uses the relevant variables from the economic scenarios
outlined above to project the values of the three primary drivers of
the Share Insurance Fund: Insured share growth, insurance losses, and
yield on investments. NCUA developed regression equations that relate
the historical movements of economic variables to movements in two of
the primary drivers of the Share Insurance Fund equity ratio: Insurance
losses and growth in insured shares. The equations translate the
economic conditions in the Adverse and Severely Adverse scenarios into
projections of the level of losses and insured share growth. The
equations are relatively straightforward and translate economic
developments into Share Insurance Fund drivers in a commonsense way
using historical data that extends back to the early-to-mid 1990s. For
example, the equation for share growth relates annual growth in total
shares (inflation-adjusted) from 1991 to 2016 to the unemployment rate,
the change in the average annual unemployment rate, the change in the
average annual three-month Treasury bill, and the year-to-year growth
in real disposable income. In the equation, a rise in unemployment
first raises share growth, but continued high unemployment eventually
leads to lower growth. Faster income growth tends to lead to faster
share growth, and a rising interest rate tends to reduce share growth.
For the insurance loss equation, NCUA projects the portion of
shares accounted for by CAMEL 4 and 5 rated federally insured credit
unions using data from 1996 to 2016 for the unemployment rate and house
price growth.\40\ As expected, a higher unemployment rate tends to
increase insurance losses, as does falling house prices. Then, the
dollar value of losses is projected as a constant percentage of the
portion of shares in CAMEL 4 and 5 rated institutions.
---------------------------------------------------------------------------
\40\ See Letter to Credit Unions 07-CU-12 CAMEL Rating System
for more information on NCUA's CAMEL rating system.
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To determine the yield on the Share Insurance Fund investment
portfolio, interest rate inputs are taken directly from the Adverse and
Severely Adverse stress scenarios. These inputs are applied to the
Share Insurance Fund's investment portfolio assuming a seven-year
ladder.\41\ Table 7 outlines the resulting inputs used each year of the
projections for the key drivers to forecast the equity ratio under the
various stress scenarios.\42\
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\41\ The interest rate inputs used were provided by
Macroeconomic Advisers, LLC (April 2017). These inputs were used for
two reasons: (1) The Federal Reserve scenarios do not provide the
yield on the seven-year Treasury note, which NCUA uses in the stress
scenarios. Macroeconomic Advisers uses its proprietary model to
extend the Federal Reserve scenarios to a wider array of economic
variables, including the full yield curve. (2) Macroeconomic
Advisers advances the beginning of the Federal Reserve scenarios to
the second quarter of 2017, rather than beginning in the first
quarter. This was necessary because, when conducing analysis of the
Share Insurance Fund, first quarter data was already known.
Macroeconomic Advisers scenarios match the Federal Reserve scenarios
for variables provided by the Federal Reserve, but the timing is
advanced on quarter into the future relative to the published
Federal Reserve scenarios, so that the Adverse and Severely Adverse
shocks begin in the second quarter of 2017. Using these scenarios
allows NCUA to implement the full effects of the downturn scenarios
developed by the Federal Reserve.
\42\ These are stress scenarios and do not represent forecasts
of likely outcomes. Federal Reserve stress scenarios provide data
through the first quarter of 2020. These scenarios are extended
through 2021 by Macroeconomic Advisers, LLC using a proprietary
model. NCUA assumes that values for the economic variables in 2022
are the same as they were in 2021 (for variables that are rates or
growth rates).
Table 7--Projected Inputs for the Primary Drivers of the Equity Ratio \43\
----------------------------------------------------------------------------------------------------------------
Base Adverse Severely adverse
----------------------------------------------------------------------------------------------------------------
Insured Share Growth.............. 2017: 5.10% 2017: 6.60% 2017: 6.92%
2018: 5.30% 2018: 6.30% 2018: 6.20%
2019: 5.50% 2019: 4.20% 2019: 2.34%
2020: 5.60% 2020: 3.70% 2020: 1.66%
2021: 6.00% 2021: 3.90% 2021: 2.48%
2022: 5.70% 2022: 4.67% 2022: 3.90%
Insurance Losses (in millions).... 2017: $52.1 2017: $142.0 2017: $216.0
2018: $58.1 2018: $311.2 2018: $532.0
2019: $52.4 2019: $257.8 2019: $425.4
2020: $60.2 2020: $202.8 2020: $292.4
2021: $78.1 2021: $164.2 2021: $230.4
2022: $76.7 2022: $188.6 2022: $269.6
Yield on Investment Portfolio..... 2017: 1.64% 2017: 1.56% 2017: 1.48%
2018: 1.92% 2018: 1.73% 2018: 1.49%
2019: 2.16% 2019: 1.84% 2019: 1.47%
2020: 2.40% 2020: 1.93% 2020: 1.47%
2021: 2.57% 2021: 2.00% 2021: 1.46%
2022: 2.74% 2022: 2.05% 2022: 1.51%
----------------------------------------------------------------------------------------------------------------
As shown above, insured share growth rises initially as consumers
move funds into safer, federally insured savings instruments--a pattern
that is highly correlated to economic downturns. After an initial
surge, growth in insured shares slows reflecting worsening economic
conditions. Toward the end of the stress scenarios, growth begins to
increase reflecting some rebound in the overall economy. Insurance
losses peak at the beginning of the economic stress and then decline
and stabilize over the following years. Overnight rates drop to 10
basis points for the entire period and the yield on investments drops
over the first three years, and then increases as the economy begins to
recover.
---------------------------------------------------------------------------
\43\ NCUA used the current budget growth of 4.1 percent in each
scenario as the operating expense input.
---------------------------------------------------------------------------
The results of each stress scenario, expressed as the calendar
yearend Share Insurance Fund equity ratio, are included in Table 8
(based on the current equity ratio of 1.26 percent).\44\
---------------------------------------------------------------------------
\44\ Using the figures in Table 1 and Table 3 above, the
calendar yearend equity ratio of the Share Insurance Fund is
projected to be 1.23 percent, if the Stabilization Fund is not
closed in 2017.
[[Page 34989]]
Table 8--Projected Equity Ratio Under Various Economic Stresses \45\
--------------------------------------------------------------------------------------------------------------------------------------------------------
2017q1 (%) 2017 (%) 2018 (%) 2019 (%) 2020 (%) 2021 (%) 2022 (%)
--------------------------------------------------------------------------------------------------------------------------------------------------------
Baseline................................ 1.26 1.26 1.24 1.24 1.23 1.23 1.23
Adverse................................. 1.26 1.25 1.21 1.18 1.16 1.15 1.14
Severely Adverse........................ 1.26 1.24 1.18 1.13 1.11 1.09 1.06
--------------------------------------------------------------------------------------------------------------------------------------------------------
Neither the Adverse nor the Severely Adverse scenario causes the
equity ratio of the Share Insurance Fund to fall below 1.00 percent,
the level at which credit union's contributed capital deposit would
begin to be impaired.\46\ However, by yearend 2019, under both the
Adverse and Severely Adverse scenarios, the equity ratio falls below
1.20 percent--the statutory trigger for either assessing premiums or
developing a Share Insurance Fund restoration plan. Under the Adverse
and Severely Adverse scenarios, for the equity ratio to not fall below
1.20 percent during the full projection timeframe, the equity ratio at
yearend 2017 would have to be 1.33 percent and 1.41 percent,
respectively.\47\ However, the actual results could vary from these
projections based on a variety of factors, including:
---------------------------------------------------------------------------
\45\ These scenarios do not account for any substantial increase
in NCUA's operating budget or increases in the loss rate of CAMEL 4
and 5 rated credit unions, both of which may increase in times of
economic stress.
\46\ Credit unions' one percent contributed capital deposits are
included in the numerator of the equity ratio and are available to
absorb losses of the Share Insurance Fund. However, because the
contributed capital deposits are recorded both as equity to the
Share Insurance Fund and as assets to credit unions, if NCUA were to
use any part of this capital to absorb losses, credit unions would
have to write-down (expense) this asset. At the same time, credit
unions would be required to deposit additional funds to adjust their
contributions back to a full one percent of their insured shares.
\47\ Similar results are obtained if the Share Insurance Fund is
stressed over two years using the highest observed stress factors
during the last ten years.
---------------------------------------------------------------------------
Projected declines in the equity ratio, even under no
economic stress.
Extraordinary losses and/or failures in credit unions that
are not market related, such as those from fraud or other asset
``bubbles''.
Unusual or abnormally high insured share growth materially
different from the historical correlation.
Economic conditions that involve greater volatility in one
or more market indicators as compared to the stress scenarios modeled.
C. Approach for Setting the Normal Operating Level
The Board has the responsibility to be prudent in managing the
Share Insurance Fund. In addition to maintaining public confidence in
federal share insurance, it is important that NCUA maintain a strong
Share Insurance Fund for the mutual benefit of the credit union
community and the taxpayers. The Board believes that the Share
Insurance Fund should be able to withstand a moderate recession without
the equity ratio falling below 1.20 percent. This approach is
consistent with the Act's minimum equity level for the Share Insurance
Fund set by Congress. Additionally, it allows NCUA to maintain a
counter-cyclical posture, which helps to ensure that credit unions will
not need to impair their contributed capital deposit or pay premiums
when they can least afford it. The Board does not believe it should set
the normal operating level at a point where mandatory premiums or
development of a Fund restoration plan would be necessary in a moderate
recession.\48\
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\48\ The Board believes its authority to establish a Fund
restoration plan in lieu of mandatory premiums should only be used
for severe, unexpected circumstances. While the Board can develop a
restoration plan to restore the Share Insurance Fund to 1.20 percent
within eight years (or longer in extraordinary circumstances), this
could necessitate one or more relatively large premiums. Further, it
could erode public confidence in federal share insurance.
---------------------------------------------------------------------------
The Board also considered the amount of equity necessary for the
Share Insurance Fund to withstand a severe global recession without
having the equity ratio fall below 1.20 percent. While the Severely
Adverse stress scenario is more conservative, the Board believes
managing to the Adverse scenario provides a good balance between
maintaining sufficient equity in the Share Insurance Fund and keeping
money at work in the credit union community.
Based on the analyses above, Table 9 shows the calculation of what
the equity ratio needs to be to withstand a moderate and a severe
recession without falling below 1.20 percent.
Table 9--Equity Ratio Needed to Withstand an Economic Stress by Risk
------------------------------------------------------------------------
Severely
Adverse stress adverse stress
scenario (%) scenario (%)
------------------------------------------------------------------------
Equity for Share Insurance Fund Stress.. \49\ 1.33 1.41
Equity for Claims on AMEs (see Table 6). 0.04 0.11
Projected Equity Ratio Decline in 2018 0.02 0.02
and 2019 (based on current performance
trends) \50\...........................
-------------------------------
Total............................... 1.39 \51\ 1.54
------------------------------------------------------------------------
To withstand a moderate recession without the equity ratio falling
below 1.20 percent, the Share Insurance Fund's equity ratio needs to be
high enough to withstand the following:
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\49\ The 2007 Board-approved policy would also result in a
recommended normal operating level above 1.30 percent. To date, the
Board has maintained the normal operating level at 1.30 percent,
which has allowed NCUA to use the excess equity to help repay
outstanding U.S. Treasury borrowings.
\50\ The equity ratio has been declining over the last several
years and is expected to continue to decline because of the low
yield on Share Insurance Fund investments and strong insured share
growth. For additional information on the methodology used to
project the equity ratio using current trends, refer to the
information provided at the November 2016 Open Board Meeting
(https://www.ncua.gov/About/Documents/Agenda%20Items/AG20161117Item5a.pdf).
\51\ This exceeds the statutory maximum normal operating level
of 1.50 percent.
---------------------------------------------------------------------------
A 13 basis point decline in the equity ratio due to the
impact on the
[[Page 34990]]
three primary drivers of the Share Insurance Fund's performance.
A 4 basis point decline in the value of the Share
Insurance Fund's claim on the corporate credit union asset management
estates.
A 2 basis point decline in the equity ratio expected to
occur prior to when the remaining NGNs begin to mature in 2020 and
remaining exposure to the Legacy Assets can begin to be reduced. This
helps ensure the 4 basis points of additional equity to account for the
potential decline in value of the claims on the asset management
estates is maintained in the Share Insurance Fund until Legacy Assets
can be sold.\52\
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\52\ The Board must consider retaining this equity now, because
as the equity ratio declines, the Board would be unable to replenish
the equity through premium assessments as long as the equity ratio
remains above 1.30 percent, per the Act. 12 U.S.C. 1782(c)(2)(B).
---------------------------------------------------------------------------
Therefore, the Board proposes to set the normal operating level at
1.39 percent. Based on the yearend equity ratio projections of 1.45
percent to 1.47 percent from Table 3, this would result in an estimated
initial Share Insurance Fund distribution of 6 to 8 basis points
(approximately $600 to $800 million) paid in 2018.\53\
---------------------------------------------------------------------------
\53\ The 4 basis points of equity included for covering losses
on the Share Insurance Fund's claims against the corporate asset
management estates, along with any recognition permitted on the
outstanding balance of the $1 billion U.S. Central capital note (an
estimated range of 2 to 5 basis points of equity), may be available
for a future Share Insurance Fund distribution--provided it is not
consumed by an increase in future legacy asset losses from an
economic downturn or other losses and factors affecting the equity
ratio. Future distributions also depend on any subsequent changes
the Board might make to the normal operating level.
---------------------------------------------------------------------------
Policy for Setting the Normal Operating Level
The Board retains the authority to reassess and set the normal
operating level periodically, in particular when there are changes in
the risks to the Share Insurance Fund's equity ratio, such as maturity
of the NGNs. Based on the approach discussed above, the Board proposes
to replace its current policy for setting the normal operating level
with the following.\54\
---------------------------------------------------------------------------
\54\ The current policy was approved at the December 3, 2007
NCUA Board meeting open to the public.
---------------------------------------------------------------------------
Periodically, NCUA will review the equity needs of the Share
Insurance Fund and provide this analysis to stakeholders. Board action
is only necessary when this review determines that a change in the
normal operating level is warranted. Any change to the normal operating
level of more than 1 basis point shall be made only after a public
announcement of the proposed adjustment and opportunity for comment. In
soliciting comment, NCUA will issue a report including data supporting
the proposal.
The Board's main objectives in setting the normal operating level
are to:
Retain public confidence in federal share insurance,
Prevent impairment of the one percent contributed capital
deposit, and
Ensure the Share Insurance Fund can withstand a moderate
recession without the equity ratio declining below 1.20 percent over a
five-year period.
V. Request for Comment
The Board seeks comments on the proposed closure of the
Stabilization Fund in 2017 and the related approach for setting the
normal operating level of the Share Insurance Fund. Commenters are also
encouraged to discuss any other relevant issues they believe the Board
should consider with respect to this matter. In particular, the Board
is interested in comments on 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, should
the Share Insurance Fund be able 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.
Commenters are encouraged to provide the specific basis for their
comments and, to the extent feasible, documentation to support any
recommendations.
By the National Credit Union Administration Board on July 20,
2017.
Gerard S. Poliquin,
Secretary of the Board.
[FR Doc. 2017-15686 Filed 7-26-17; 8:45 am]
BILLING CODE 7535-01-P