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Our credit union just finally crawled over the magic 7% - whew, but I have wondered about CUs with 10+ net worth and where they're headed.
A clear and concise case against excessive net worth.
Amen! Examiners go ballistic if net worth drops 1 basis point. I have to consider this when setting dividends. I'm hoping objective ALM analyses will convince examiners that net worth requirements are not a "one size fits all" calculation.
As one who has lived through the Carter inflation rate scenario where we saw a 13 point rise in rates in 13 months, with the result being that a huge number of financial institutions were, reality, 'under water' if they had had, as we now do, mark-to-market. Some Cu's, S&L's and banks were kept alive by accounting scenario's that today would not pass muster. At our CU we view our capital not from a regulatory standpoint but from a strenuous analysis of what-if's/worse-case to determine what our sound capitalkk would be if the 13/13 event were to reoccur. Our capital management philosophy is based around maintaining the capital levels so that if that happened we could survive that year with sufficient sound capital from a NCUA regulatory standpoint. We believe that our members are best served when their deposits and their cu follows such a sound 'insurance' policy. The so-called costs of capital can be viewed as insurance premium expense.
It's hard to find the words that say how much I agree with Mr. Dolan-Heilinger when I'm standing on my chair applauding! Carolyn M Wraden, CCUE, a former NCUA examiner, Region IV.
I agree with the final comment in the article, NO.
If I may reiterate my final point in the article, it is up to the credit union to do a high quality, thorough analysis to determine what it's net worth should be, not just build up to 2 decimal places and beyond. John D-H
The size of the elephant in the living room really depends on the weight he or she is expected to carry and for how long she is expected to carry it. For many credit unions 7 percent net worth is sufficient, heck 2 percent might be enough, but for many 10 percent not sufficient. This really depends on the asset size, board's goals, growth rates planned, asset quality accepted, interest and other risks accepted. For example, a credit union concentrating in sub prime lending certainly needs more capital than one that only grants A paper grade loans. A credit union that holds large amounts of 30 year fixed rate loans needs more net worth than one that is generally short term and has minimal interest rate risk. The net worth needed to ensure continued services for members also depends on the risk profile of the membership, is the FOM single sponsor, or diversified, are its member's economic diversity vast or narrow, etc. There are numerous credit unions that would still be serving members today if they only had 10 percent, and not 7 percent net worth. I acknowledge that no credit union with 7 percent net worth has ever failed, they usually drop from 7 to one or two and then fail and generally it is because the CEO made a critical mistake.
Send this to all the examiners
Send this to all the examiners
Examiners are allowed to play the "safety & soundness card" way too many times. Excellent article. I'm saving it.
Great analysis of an issue that demands more attention and action from this industry. As a former credit union CEO, I can't tell you how many times I've seen a finding on an examination report whose reference document was "SSBP" - not NCUA Rules & Regs, not the FCU Act, but "Safe and Sound Business Practices". When I questioned examiners as to where I might find this printed document, I was told that it's not a printed document, but it is based upon the examiner's and NCUA's sense of safety and soundness. If credit union's must defer to the arbitrary determination of "what's safe and sound" as determined by an individual examiner, then I find that troubling. Mr. Dolan-Heilinger's methods and reasonings make infinitely more sense to me.
Right on target!
Excellent point that needs to be repeated. PCA and the capital definitions it brings is only a start. Now we need to incorporate these definitions into our strategies. A well-thoughtout plan will go a long way toward persuading the regulator.
I agree with this article. Also, why are they allowed to give a lower CAMEL rating if capital levels are above 7%? This rating is not subjective.... The underlying issue is that the regulators are not there to help us with our business. In fact, I would argue that they are unclear as to proper use of the capital for continued business and our managing it for the members benefit. By policy we don't want more than 10% but no less than 8%. If capital were to go above that level we would declare a bonus dividend of some type for the members benefit.
Since the person whose posting began, "PCA is a one size fits all..." chose to post comments about my credit union's financial results, I would appreciate his or her posting his or her own name and credit union for comparison by me and other folks who post here. I would welcome visits to Keys FCU by any credit union member, manager or examiner. I'd love to discuss my financials and how we have benefitted our members. In fact, following the weird exam we had a team of special actions examiners visit us. They seemed mystified as to why we had been pressured into agreeing to such an excess capital level. So, please post your name and credit union and I would be happy to discuss with you our situation and financials. Actually, it might be a good point counter-point that could be published in Callahan's! I'll participate. IMHO, if you believe that maintaining higher capital levels are a significant financial contributor to enhancing your ability to serve your members with better rates, I suspect you will not be able to support that in a thorough analysis. The efficient use of capital is a basic finance course topic. Hmm, how about identifying yourself and lets discuss things openly? John Dolan-Heitlinger Keys Federal Credit Union BTW, how come everyone is masked on this site?
PCA is a "one size fits all" regulation. In reality, this does not work. While there are plenty of large credit unions that can operate with lower levels of net capital, there are plenty out there where 12% isn't sufficient by virtue of a lack of internal controls (leading to fraud which can, and has, taken out credit unions) and/or management ineptitude (high loan losses because an indirect lending program wasn't implemented correctly, comes to mind). Also, the author indicates the need for quantitative measures and scenario testing to determine capital requirements. Exactly how do you quantify fraud and mismanagement? Answer: you can't. These can only be measured after the fact. Contrary to his opinion, high capital allows credit unions to be competitive as higher dividend rates/lower loan rates/lower fees and charges can be offered to the membership since the credit union no longer needs to accumulate capital (by the way, the financial ratios for author's own credit union show above peer average fee income and recently had a year where provision for loan lose expense was approximately 2% of average assets - how were their members helped at this credit union???). Based on his credit union's financial statements and recent poor financial performance, I think this CEO needs to listen to his NCUA examiners when they tell him he needs more capital (and any other recommendations they have regarding loan losses and underwriting procedures/processes).
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