With another premium assessment all but certain, the National Credit Union Administration began exploring ways to keep credit unions from having to write those checks and found it could probably give those institutions a refund in the process.

NCUA Chairman J. Mark McWatters, speaking Oct. 12 at the Cooperative Credit Union Association's annual convention, outlined the thinking behind the regulator voting last month to close the stabilization fund and transfer its assets and liabilities to the share insurance fund. Once that is complete, the NCUA should be able to make a $600 million to $800 million distribution to credit unions in 2018.

At the same time, the regulator raised the normal operating level of the share insurance fund to 1.39% from 1.30%. Some industry observers said that will diminish the impact of the refunds. "It's akin to giving out money with one hand while simultaneously taking it back with the other," former NCUA board member Geoff Bacino said.

Speaking at the convention, McWatters said the normal operating level was moving downward, and before the merger of the funds it sat at about 1.25%. He said if it continued on the downward trajectory, credit unions likely would have faced a 6- to 8-basis-point assessment, possibly as early as next year. "That premium assessment would mean you would have to do something you don't like to do and that is take out your checkbook and write a check to the NCUA," he said.

The NCUA first looked at simply borrowing from the stabilization fund for the share insurance fund but found that was not legally permissible. So plan B was to combine the funds, McWatters said.

To calculate the new operating level, the NCUA stressed the share insurance fund under a moderate recession scenario and came up with a new base level of 1.33%. Under a severe recession scenario, the level would have had to be moved to 1.41%, McWatters said. The regulator considered splitting the difference but McWatters said that seemed arbitrary especially because moderate recessions are much more common than severe economic downturns.

So the NCUA decided to move the level to 1.33% but also had to account for combining the "far riskier" assets of the stabilization fund into the share insurance fund. "You're truly mixing apples with oranges and that can be dangerous," he said. The agency decided that under the moderate recession scenario the collateral for the NCUA Guaranteed Note Program, or NGNs, could decrease in value by $400 million. So another 4 basis points were added to the normal operating level.

Dover FCU Chairman Jeannette Schuler said moving the level to 1.39% seems like an overcompensation and that it probably could have been held at 1.37%. McWatters said the NCUA feared that if it set the level too low and ended up assessing a premium there would be a "general irritation factor" among credit unions for having to write those checks.

McWatters was asked if concern over taxi medallion loans played any role in the normal operating level calculations. He said that it had not specifically, but he added that the lending line bears watching.

"Am I concerned that there is a possibility that there could be additional losses in the future? Yes I am," he said. But moving the normal operating level above 1.39% to capture those potential losses could not be justified until auditors and accountants believed additional reserves were needed. "Until then I believe it's best to leave it where it is," McWatters said.

The NCUA is able to pay refunds in large part due to the more than $5 billion it has received from lawsuits. The NCUA, however, paid more than $1 billion in legal fees in its efforts to make recoveries from large banks that sold faulty residential mortgage-backed securities to five corporate credit unions. McWatters said the NCUA "way, way, way" overpaid for those legal fees.

Cooperative Credit Union Association President Paul Gentile said the association strongly supports the NCUA's plan in regards to the stabilization fund closure. "We're often very critical of what the regulators are doing, but this plan I thought made a lot of sense," he said.