NCUA Chairman Todd M. Harper’s Remarks at the 2023 NAFCU Congressional Caucus

As Prepared for Delivery on September 12, 2023

Good morning, everyone. Thank you for that warm welcome. And, thank you, Greg, for the kind introduction, and to NAFCU for inviting me to join you here today.

Last week, the NCUA released the credit union system’s performance data for the second quarter of 2023. Now, I realize that a brief rundown of the latest industry data is not the best way to keep an audience riveted right before lunch. But, all joking aside, I believe the latest data do provide important insights into the current state of the credit union system, as well as the opportunities and challenges ahead.

Second Quarter 2023 Performance Data

Overall, the performance metrics indicate that the credit union system remains well positioned at this time. What’s more, they give us reason for cautious optimism, with emphasis on the word, “cautious.”

For example, the industry’s aggregate net worth ratio grew to 10.63 percent, which represents an increase of 21 basis points over last year, and a recovery of 61 basis points from the pandemic’s low. And, at the end of the second quarter, we recorded a 12.6 percent year-over-year increase in the number of credit union loans. While that figure lags slightly behind what we observed during the previous four quarters, it indicates a continuing trend of healthy loan growth.

"Overall, the performance metrics indicate that the credit union system remains well positioned at this time. What’s more, they give us reason for cautious optimism, with emphasis on the word, 'cautious.'"

Another upward trend that shows no signs of slowing down is the number and size of large and very large credit unions. The most recent quarterly data shows that the number of federally insured credit unions with assets of at least $1 billion stood at 421 in the second quarter of 2023. Together, these billion-dollar-plus credit unions held $1.7 trillion in assets. That represents more than three out of every four dollars within the system. And, following a longstanding pattern, these credit unions reported the strongest growth in loans, membership, and net worth over the year ending in the second quarter of 2023.

Warning Signs in the Data

But, that’s only part of the story revealed in the second quarter data.

Economists are forecasting a slowdown later this year as the lagged effects of elevated interest rates take hold. Moreover, the recent downgrade in the Moody’s credit ratings for several regional banks signals ongoing stress on the financial system’s funding and economic capital.1 The credit union system has not been immune from this financial stress. During the last few quarters, the NCUA has also seen growing stress within the system because of interest rate and liquidity risk. And, we are seeing growing signs of credit risk emerging, especially in the commercial real estate market and among families with increasingly stressed household budgets. Many households are showing signs of significant financial strain, as seen in rising delinquency rates for various loan types, including auto loans and credit cards. The delinquency rate at federally insured credit unions was 63 basis points in the second quarter of 2023, up 15 basis points compared with the second quarter of 2022. The credit card delinquency rate rose to 154 basis points from 107 basis points one year earlier. The auto loan delinquency rate increased 22 basis points over the year to 67 basis points in the second quarter.

"The high levels of interest rate risk we are seeing can also increase a credit union’s liquidity risks, contribute to asset quality deterioration and capital erosion, and put pressure on earnings. Other timely issues, including the reinstatement of federal student loan repayments and rising costs for property and casualty insurance, will also have an impact on already strained household finances."

To compound those concerns, we are seeing an increase in net charge-off ratios and declining annualized returns on average assets for credit unions. The net charge-off ratio for all federally insured credit unions was 53 basis points in the second quarter of 2023, up 24 basis points compared with the second quarter of 2022.

The high levels of interest rate risk we are seeing can also increase a credit union’s liquidity risks, contribute to asset quality deterioration and capital erosion, and put pressure on earnings. Other timely issues, including the reinstatement of federal student loan repayments and rising costs for property and casualty insurance, will also have an impact on already strained household finances.

Takeaways from the Second Quarter Data

So, what should we make of this good news-bad news picture of the second quarter data?

For me, the biggest takeaway is that we are seeing the tale of two types of credit union members, both of which represent risks that credit unions must manage. The first type are the savers who have shifted deposits to share certificates to take advantage of better rates, which can expose credit unions to greater interest rate and liquidity risks. And the second type are the members with growing financial stress, many of whom are on the wrong side of the higher delinquency rates in credit cards and auto loans. With this rising household financial strain, credit unions must carefully manage their credit risks going forward and consider early intervention to prevent a delinquency from becoming a charge-off.

Credit unions must also remain prudent and proactive in managing interest rate risk and the related risks to capital, asset quality, earnings, and liquidity. The NCUA will continue to monitor credit union performance through the examination process, offsite monitoring, and tailored supervision. In addition, the NCUA is coordinating with other federal financial institution regulators to ensure the overall resiliency and stability of our nation’s financial services system. However, and I need to stress this again, credit union executives, supervisors, and boards of directors must remain diligent in managing the potential risks on their balance sheets and monitoring economic conditions and the interest rate environment.

"These service providers are on the frontlines of the increasing adoption of artificial intelligence and instant payments by financial institutions hoping to better serve their customers’ evolving needs. As a result, this growing regulatory blind spot in the financial system compromises our nation’s economic security, poses risks for the financial well-being of our citizens — and more immediately — threatens the reserves of the National Credit Union Share Insurance Fund, which you all contribute to, should problems and losses at a vendor lead to the collapse and failure of a credit union."

The NCUA’s Legislative Asks

All of these economic and performance factors are reasons for the NCUA Board’s ongoing engagement with Congress to amend the statutory requirements for the Central Liquidity Facility so it can more efficiently serve as a liquidity backstop for the credit union system. And, these challenges are why the agency will keep advocating for the restoration of its authority to examine critical third-party vendors.

These service providers are on the frontlines of the increasing adoption of artificial intelligence and instant payments by financial institutions hoping to better serve their customers’ evolving needs. As a result, this growing regulatory blind spot in the financial system compromises our nation’s economic security, poses risks for the financial well-being of our citizens — and more immediately — threatens the reserves of the National Credit Union Share Insurance Fund, which you all contribute to, should problems and losses at a vendor lead to the collapse and failure of a credit union.

It is, therefore, essential that you all understand the risks resulting from the NCUA’s lack of vendor authority are real and impact all of us. And, the NCUA will continue to pursue statutory amendments to the Federal Credit Union Act to enable the NCUA Board to proactively manage the Share Insurance Fund. A full counter-cyclical approach would help ensure that credit unions will not need to impair their contributed capital deposit or pay premiums to the Share Insurance Fund during times of economic stress, when they can least afford it.

Bolstering the CLF, restoring the NCUA’s vendor authority, and increasing the flexibilities of the Share Insurance Fund will enable the NCUA to help credit unions and the broader financial system to be safer, resilient, and prepared for unforeseen contingencies.

That concludes my formal remarks. Greg, I look forward to our conversation.