Should Your Credit Union Prepay Its Corporate Bailout Assessment?
NCUA recently announced a proposed plan to permit credit unions to voluntarily prepay their annual assessments for the corporate credit union (“CCU”) bailout, which the agency projects to be $2.94 billion (38 bps) for the next two (2) years.
Should your Credit Union consider it? Before you make a decision to do so, we think you need to consider several issues. First and foremost, the ultimate amount needed to bailout the CCUs is unclear. NCUA’s and CUNA’s estimates of the ultimate loss range from $12 billion to $15 billion. Considering “only” $2 billion in losses have actually been realized so far (which means that the CCU’s capital has yet to be exhausted), the ultimate bailout cost could be much lower than projected. If that turns out to be the case, your Credit Union could prepay to cover a loss that may never occur.
Second, you should consider the benefit to your Credit Union. NCUA suggests that prepayments will drive down borrowing costs, which will result in lower actual assessments. Whether this would result in anything beyond a negligible benefit is unclear.
Third, you should consider, in light of your Board’s fiduciary duties, the apparent lack of a financial incentive for prepaying. Most businesses incent prepays with a discount.
Further, the accounting treatment of such a prepay is unclear, but should be clarified before committing to any prepay.
Finally, beyond the CCU bailout, a review of the current state of the NCUSIF is encouraging. Since 2008 (thru 4/30/11) NCUA has closed 56 credit unions at an estimated cost of approximately $3.6 billion to the NCUSIF. Despite this, the NCUSIF’s reserve ratio as of 12/31/10 was 1.25%. Compare this to the FDIC’s Deposit Insurance Fund (“DIF”), which stood at -.12% as of 12/31/10. In addition to the coming assessments to FDIC insured institutions for failed banks, per the Dodd Frank Act, the DIF must be converted to a “reserve fund” (just like NCUSIF) and funded to a 1.35% reserve ratio by 2020.