The equity ratio of a fund that insures the deposits of credit union members will dip below a key Congressionally-mandated threshold by the end of summer. If that happens, the credit union industry's federal regulator, the National Credit Union Administration (NCUA), will be required to propose a recapitalization plan to Congress. The chairman of the NCUA said she will not let the fund operate undercapitalized, and in a speech Thursday, told credit union executives to expect increased assessments. Debbie Matz conveyed a message of tough love in her address to an industry trade group Thursday — credit union lending practices will dictate future increases in deposit insurance assessments. "The amount of the assessments for the National Credit Union Share Insurance Fund (NCUSIF) really depends on the industry’s own performance,” Matz told the National Association of Federal Credit Unions (NAFCU) 43rd annual convention in Chicago. “The level of assessments is a direct result of the decisions that you make, as executives and board members, in conducting your business.” "Simply put: If credit union losses are lower, credit union assessments will be lower," she added. The NCUSIF works similarly to the Federal Deposit Insurance Corp.'s (FDIC) deposit insurance fund. Credit unions pay assessments to the fund, which is used to guarantee deposits should a credit union fail. Like the banking sector, credit unions experienced a surge in failures in 2009, and continue to mount in 2010. The fund paid out $124m in charges during 2009. Congress mandates the fund's equity ratio — retained earnings of the fund, divided by insured shares — operate within the range of 1.2% to 1.3%. Earlier this year, the NCUA board announced it would add an additional $132m to its reserves to budget for additional losses. The increase brings the total provision for losses to $1.1bn so far this year. But that might not be enough, Matz said. The fund's ratio is currently 1.22%, and she projects it will drop below 1.2% by the end of this summer. If that happens, the NCUA is required to submit a plan to Congress showing how it will get back above the 1.2% benchmark. Crossing the 1.2% threshold also triggers an automatic premium assessment on the credit union industry, though the NCUA board has the discretion to waive that charge. If the equity ratio dips below 1%, another automatic assessment is levied, which the NCUA cannot waive. "At a time when so many credit unions are vulnerable, it is virtually impossible to manage the equity ratio with a fine measure of precision, while maintaining a reasonable margin of safety," Matz said. "But I assure you: The Share Insurance Fund is strong and resilient — and that will not change." Matz said she objects to calls by the NAFCU and other industry groups to allow the fund to operate below the 1.2% threshold. While it would ease the burden of assessments on individual institutions, Matz said reducing the fund’s safety margin much further would be irresponsible. "Given the magnitude of losses that are now likely, I believe it is not practical to try to manage the ratio to just a few basis points above the statutory minimum of 1%," she said. Prior to her confirmation as head of the NCUA nearly one year ago, Matz served as chief operating officer of a federal credit union and as an NAFCU board member. Matz said credit union concerns about the level of assessments are understandable, but charged the industry with taking responsibility for their lending practices — to continue lending to creditworthy borrowers, but with the proper due diligence in place. The number of troubled credit unions is on the rise, up 31% to 2,100 in 2010, compared to 1,600 three years ago, Matz said. The NCUA and FDIC use the Capital, Assets, Management, Earnings, and Liquidity (CAMEL) rating system to measure financial institution performance and risk, on a scale of one to five. A CAMEL rating of five is considered unsatisfactory performance in need of immediate remedial attention. Of the 130 credit unions with more than $1bn in assets, 30 are now rated CAMEL three, four or five. In addition, credit unions rated CAMEL three, four or five hold about 21% of all federally insured assets. "To put this trend into perspective: With more than $150bn in shares in CAMEL three, four and five credit unions, the risk to the Share Insurance Fund is more than three times higher than it was in December 2007, when the recession technically started," Matz said. That increased strain on the industry is the cause of higher insurance fund assessments, Matz said. To reverse that trend, she told credit unions to reevaluate their lending practices. The NCUA will step up its own reviews of institutions, both with increased frequency — examining individual credit unions annually, instead of bi-annually — and a faster response to critical problems, like excessive delinquency rates in indirect lending, member business lending, and loan participations. "We are not telling you to avoid engaging in those activities. We are saying that, if you pursue them, you need to do your own due diligence," she said. " If NCUA finds that your delinquencies are rising and your due diligence is inadequate, an examiner is likely to visit your credit union and suggest improvements to your underwriting." Write to Austin Kilgore.