Corporate Corner: Assessments for the Stabilization Fund

Corporate Corner is a series of articles written by the Washington Credit Union League that will examine various aspects of the corporate credit union crisis and the NCUA’s plans to resolve the issue and stabilize the industry.  The second article will take a look at the assessments for the Stabilization Fund.

One of the burning questions of every credit union when it comes to the legacy assets and the assessments for the Stabilization Fund is, “What is it going to cost me?”  While the question is straight forward, the answer is not.  A number of factors go into the calculations for the Annual Stabilization Assessments.  The factors range from the different projections in the overall cost of the stabilization to assumed growth rates of insured share deposits.  Much of the mathematics behind the assessments seems to come straight out of the Chaos Theory (Where the smoke from a factory in China will cause fluctuations in the stock market on Wall Street).

What is the expected loss of the legacy assets?

The NCUA conservatively estimates the future losses on the legacy assets between $14 and $16 billion.  Of which, $5.6 billion has already been covered by wiping out the capital of the conserved corporate credit unions.  This leaves between $8.4 and $10.4 billion to be covered by assessments on natural person credit unions.  Credit unions have already paid $1.3 billion in assessments for the stabilization fund, leaving a range of $7.1 to $9.1 billion to be assessed over the remaining 11 years of the extended life of the Stabilization Fund.

The NCUA anticipates that the greatest needs to meet upcoming demands on the Stabilization Fund will occur in 2012.  Credit unions can expect the initial assessments in 2011 and 2012 to be higher to meet the demands due to the maturity of medium term notes.  After that the assessments should level out, and possibly decrease if the realized losses are less than expected.

How would the growth of share deposits affect the assessment?

Growing deposits within the credit union industry will have the effect of pushing the basis points required by the assessments down.  The greater the growth rate of the deposits, the more down pressure there will be.

To illustrate this point, we will use the midpoint of the expected losses or $8.1 billion.  If the NCUA assesses the loss evenly over 11 years, the average assessment would be $736 million a year.  To calculate the amount of assessment the NCUA would divide the $736 million by the total amount of insured shares.  If the total amount of insured shares in 2011 is $736 billion*, then the assessment would be 10 basis points.  (*Figured used for easy math, not factual number)  If the total amount of insured shares increased by 5% in 2012 then there would be $772.8 billion in insured shares and the assessment would be 9.52 basis points to pay for the same $736 million in losses to the Stabilization Fund.

While the example is simplistic, it illustrates how growth of insured shares is not necessarily a bad thing.  The total dollar amounts of the assessment would not change, just the amount as a percentage of the total insured shares would.  Each year of growth would further decrease the number of basis points required to cover the dollars of the loss. 

It is important to note that now that the share insurance is at permanently at $250,000 the total amount of insured shares will increase.

So, what are the estimates of the assessments we’ll see

As mentioned before, the NCUA expects to have higher assessments in 2011 and 2012 to cover the maturing medium term debt.  Figures for the assessments in 2011 and 2012 are ranging from 9.0 to 9.5 basis points.  Final assessments in 2021 are projected to be around 5 basis points, but depending on lower fund losses and higher insured share growth the assessments could go down into the 4 basis points range.

In the end, what the actual assessments will turn out to be will depend upon a lot of different factors, and what those butterflies in China are doing.

Posted in NCUA.