Questions Arise Over Loss Estimates

Michael Moebs is someone whose opinion I respect. I think he is right to be concerned about the NCUA loss estimates for the corporates (CU Journal, Jan. 9, 2012). The GAO found that NCUA could not provide documentation of their loss estimates. That raises a big question about the accuracy of those estimates. The performance of the investments has continued to deteriorate which leads me to assume that the eventual losses will be higher than the estimated losses.

What Mr. Moebs did not cite in his article is that unlike banks, credit unions carry their 1% insurance fund deposit as an asset. In order to be comparable to other financial institution capital ratios, credit unions would have to write off the 1% share insurance deposit and reduce capital by 1%. That is another example of why credit unions may not have enough capital to support future growth.

When all of the issues that Mr. Moebs raised are considered, it becomes clear that future credit union growth is very likely to be limited by capital. The lack of adequate capital is what created the corporate credit union disaster. The corporates took excessive risks to increase earnings and to fuel asset growth. Will credit unions resort to riskier business strategies to build capital?

Credit unions will face a long period of low earnings while at the same time face higher capital requirements. That creates another incentive to take business risks that may not be prudent.

At the same time NCUA is facing increasing criticism. The GAO report following numerous critical reports by the NCUA Inspector General raises the question whether NCUA will follow OTS into the dust bin of history.

If that happens Michael Moebs may be correct. The NCUSIF could very well be merged into FDIC. My assumption is that the Treasury Blueprint would be enacted. Credit Unions over $500 million would be moved to OCC regulation and would be taxed but in exchange the credit unions would have alternative capital, no business lending cap and no FOM restrictions. The smaller credit unions would be moved to state regulation, retain their tax exemption longer and would remain non-profit, membership organizations.

Henry Wirz, CEO
SAFE Credit Union, N. Highlands, Calif.