NCUA’s Net Worth Reform: Bad for Credit Unions; Bad for Members

January 30, 2014 at 9:02 am Leave a comment

NCUA has taken its obsession with how best to protect the Share Insurance Fund to an extreme with its recent risk-based net worth requirement. In putting forward its radical proposal to impose enhanced risk-based net worth requirements on those credit unions lucky enough to have $50 million or more in assets, the NCUA is proposing a solution in search of a problem. Absent evidence that the current RBNW poses a risk to the credit union industry as a whole, there is no demonstrated need for the type of reform that NCUA is seeking to impose.

According to the NCUA, 90% of credit unions already meet the proposed net worth requirements. But this statistic only tells half the story. First, credit unions suddenly deemed to have inadequate capital will have to scramble for ways to comply with this new mandate, notwithstanding the fact that they, unlike their banking counterparts, cannot go out and raise additional capital through stock offerings. This means that members of these credit unions will pay the price for NCUA’s dictate in the form of fewer and/or less competitively priced financial products. With the economy still sluggish, this is a strange time to be putting the brakes on sound financial institutions. In addition, even though the vast majority of credit unions will satisfy the new net worth requirements, these enhanced restrictions represent a barrier to future growth.

In putting forward this proposal, NCUA acknowledges that while credit unions generally have high capital, it complains that in recent years the Share Insurance Fund experienced several hundred million dollars in losses “due to failures of individual credit unions holding inadequate levels of capital relative to the levels of risk associated with their assets and operations.” NCUA complains that its examiners did warn these credit unions of the risk, but that these recommendations were unenforceable.

With all due respect, there is something wrong with this logic. The goal of the fund is not to prevent all losses. It should surprise no one that individual credit unions, either because of severe economic conditions, mismanagement or a combination of both become insolvent. But to suggest that all credit unions should have to pay the price for these events ultimately robs credit unions of their obligation to run their institutions in the way that reflects the needs of their community and the members for whom they operate.

To be fair to NCUA, there are certainly going to be situations where a credit union could be complying with relevant rules and regulations but still operating in a risky manner. Therefore, it is justified in clarifying that it has the authority to impose capital requirements on individual credit unions where a unique composition of assets poses risk to its safety and soundness. However, there is no such thing as a completely safe financial environment and by imposing enhanced capital requirements on all credit unions, NCUA is taking money from members and failing to strike a proper balance between managing risks and allowing credit unions to run their businesses.

Entry filed under: Advocacy, Compliance. Tags: .

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Authored By:

Henry Meier, Esq., General Counsel, New York Credit Union Association.

The views Henry expresses are Henry’s alone and do not necessarily reflect the views of the Association.

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