How Well Did NCUA Manage The NCUSIF In 2013?

A credit union owner's analysis reveals a $357 million real loss of market value in the National Credit Union Share Insurance Fund over the past 12 months.

 
 

Earlier this month, I urged credit unions to step up oversight of the NCUA’s management of the National Credit Union Share Insurance Fund. I wrote the CreditUnions.com article NCUSIF’s Credit Union Owners Need To Step Up Oversight after reviewing the fund’s December 2013 financial report that showed the fund had continued to invest long term. Even as NCUA’s examiners and staff economist beat the drum about interest rate risk, in December, the NCUSIF invested $400 million in six bullet Treasury bonds with a duration of 7.75 years. 

A Full Year’s Analysis

One credit union CEO has analyzed the fund’s investment decisions over the past 12 months. Says this CEO:

“If you were a professional, seasoned investment manager convinced interest rate risk was the No. 1 threat on the financial planet due to an imminent, rapid surge in interest rates what would you do? 

Professional money managers would do at least two things:

  1. Shorten the term of the existing portfolio by selling securities to reposition for those higher rate investment opportunities;
  2. Invest new inflows of funds in short-term securities to await the greater earnings available when rates surge."

Click here to read the analysis through November 2013. Please note, however, market value loss of the NCUSIF portfolio at December 2013 is now $357 million as opposed to the $253 million stated in the CEO’s analysis. This is not a stress test or hypothetical loss; this is the actual decline in market value. This total is now approaching two full years of interest income for the fund.

The Real Risk

The critical issue runs deeper than the loss in the NCUSIF’s market value. It’s even larger than the fact that NCUA’s own management of the fund is contrary to the direction it is giving credit unions. The critical issue at hand is that when NCUSIF might need liquidity, the investment portfolio will be underwater. If the market value is less than the book value, then NCUA will have to sell securities at a loss if it needs cash.

This liquidity management challenge is entirely new. During the last financial crisis, the NCUSIF was the largest borrower from the Central Liquidity Facility (CLF), with more than $10 billion for just two institutions. That option no longer exists because NCUA dismantled the cooperative liquidity safety net developed by the corporates and the CLF.

The NCUSIF must now manage its liquidity to ensure funds are readily available for workouts, capital infusions, or even liquidations without creating an investment loss for the credit union owners. To assess a premium to cover market losses would place additional burdens on the system at a time when counter-cyclical regulatory actions are most needed to fulfill the cooperative’s market role in a crisis.

Respect For The Fund’s True Owners

Every time any credit union member deposits $1 in their credit union, the credit union sends 1 cent to the NCUSIF. Credit unions are re-assessing their portfolio management strategies in light of the Federal Reserve’s tapering actions — shouldn’t the NCUSIF do likewise? How will the NCUA board address this issue as market losses mount? How does the board demonstrate its respect and responsibility to the NNCISIF’s ultimate owners, the credit union members whose deposits are the foundation of the fund?

 
 

Feb. 24, 2014


Comments

 
 
 
  • I have no problem with NCUA purchasing some 7.75 year bullets. I did the same thing in January of this year. However, I offset the risk those bonds would face if rates moved up with some well structured shorter CMOs and 6% or higher mortgage pools that will do well if rates move up, relying on the bullets for current income and rates down protection. My question is, did NCUA do the same? 2013 was a terrible year for long term bond investors. But when you look at returns that were made in previous years by those who ignored "professional money managers" who were saying what they are still saying "stay short rates can go down any further", they performed very well. So my second question is, how did NCUA do over a three year period? Fear not, I know the disgusting answer. The real question, therefore, is if someone at a small credit union in Montana can know the proper way to mangage a portfolio, why doesn't NCUA?
    Sandy Mitchell
     
     
     
  • Lets see how an examiner would CAMEL rate the management of the NCUSIF. Capital adequacy--3. The fund meets the threshold for ratio of assets to insured shares. Asset Quality--While the assets are of high quality, we have to rate this area as a 5 because there is excessive interest rate risk per the NCUA Boards guidance. Management--we would rate this as a 5 due to excessive risk taking, poor liquidity management and potential for major investment losses in the event of a liquidity crisis. Earnings--an unrealized loss of $357 could easily become a realized loss so we give this a 5 rating. Liquidity--failure to maintain adequate liquidity is a serious problem for an insurance fund. The high levels of unrealized losses raise serious questions about liquidity management. We rate this as a 5. Good thing that no one is held accountable for this kind of management!
    Henry Wirz