Should the big guys chip in more for Share Insurance?

As part of a Dodd-Frank mandate to increase bank insurance assessments to 1.35 by 2020, the FDIC recently announced an additional assessment. Since credit unions don’t belong to the FDIC, you might be thinking that I am one coffee short of thinking straight and you may have a point.

But, this regulation provides an opening to broach a touchy subject that I have been thinking about since I have been analyzing the Overhead Transfer Rate (OTR). Should Share Insurance assessments be weighted so that larger credit unions pay more per assessed share than do smaller ones? It’s worth considering. Done properly it would provide mandate relief for smaller credit unions and result in a system in which the larger institutions pay more because they take up a disproportionate share of NCUA’s time and have a greater potential impact on the system as a whole.

Under Dodd-Frank, the FDIC must offset the effect of the increase in the minimum reserve ratio on insured depository institutions with total consolidated assets of less than $10,000,000,000. In its recent regulation, the FDIC announced it would do this by imposing a surcharge on banks with $10 billion or more once the deposit fund reaches a ratio of 1.15. Larger institutions will be hit with a surcharge of 4.5 basis points, which the FDIC expects will be sufficient to raise the reserve ratio from 1.15 percent to 1.35 percent in two years.

Here is what I’m thinking about. The NCUA is taking more than 73.1% of its budget from the Share Insurance Fund (OTR) to cover expenses associated with NCUA’s insurance-related activities. Based on NCUA’s projections, that money is disproportionately being spent on overseeing larger credit unions. This makes perfect sense to me. What doesn’t make sense is that a $20 million credit union is hit with the same assessment percentage as a $2 billion one. It’s inherently regressive. In addition, if larger credit unions pose a greater risk to the insurance fund why shouldn’t they pay more for funding it?

Again, the FDIC is instructive. Since 1993 it has been required to implement a risk based assessment system based on the complexity of a bank’s operations. 12 USC 1817(b). I don’t think that credit unions need a risk-based Share Insurance system, but NCUA has already decided that for Risk-Based Capital purposes, sophisticated credit unions are those with more than $250 million in assets. Why not use that as the threshold for weighting Share Insurance assessments based upon asset size?