RALEIGH, N.C.-State Employees' CU, one of four $10 billion-plus credit unions that would be stress-tested under a proposal being considered by NCUA, is all in favor of the tests now undergone by big banking companies and insists the results should be made public, just as they are for banks.
"I think it's a good idea and I think it should be done," said Jim Blaine, president of the $26 billion credit union. Blaine suggested that instead of having NCUA perform the stress tests, the Federal Reserve-which already has set parameters and tested banks-should conduct them.
NCUA Chairman Debbie Matz announced the proposal in a speech at the annual NASCUS State System Summit last week (see related story, page 3). The NCUA Board plans to issue the proposed rule for public comment before the end of the year.
Blaine said State Employees' CU, which is the nation's second-largest, has already used the government's standards to conduct its own internal stress testing. The test analyzes how a financial institution's balance sheet will perform under the stress of high unemployment, inflation, rapid rises in housing prices and other scenarios. "We tried to simulate it from the Fed's parameters," he said.
The Dodd-Frank Act requires certain financial firms with more than $10 billion in assets to conduct annual stress tests. Matz asserted that stress testing is just as important for the biggest credit unions.
Blaine, who has campaigned to make confidential CAMEL codes public, is adamant the results of the tests should be made public. That way members and investors, in the case of banks, know the true health of their institutions. "It's not worth anything if it's not published," he said.
Whether to make the results public is under review, according to Matz, adding that banks are publicly traded entities, unlike credit unions. She also said though public disclosure could enhance transparency to members, results could also be misinterpreted and lead to inaccurate conclusions about a CU's stability.
The three other credit unions that would be subject to the proposed stress testing are Navy FCU, Pentagon FCU and BECU. Another credit union-SchoolsFirst FCU-is poised to hit the $10 billion threshold by year-end.
"At NCUA, we need to utilize all the tools at our disposal to look ahead in order to protect the industry in the future," Matz said. "Stress tests are forward-looking measures. They're designed to determine whether an institution is holding an adequate capital cushion to survive adverse scenarios and to allow credit unions to make adjustments before a crisis hits."
"With more than $1 trillion in industry assets, deposits at federally insured credit unions are protected by a fund of just over $11 billion," Matz said. "However, four credit unions each have assets of $10 billion or more. So, each of those four has assets nearly the size of, or greater than, those of the Share Insurance Fund."
Matz said stress testing would be part of NCUA's "coordinated approach" to supervision of a changing industry with asset growth concentrated in large credit unions. Stress testing of federally insured credit unions with state charters would be conducted in consultation with the state regulator.
The shocks used in the stress testing would be based on scenarios issued annually by the Federal Reserve, with adjustments for differences between banks and credit unions.
A credit union that fails a stress test would be required to revise its capital plan to demonstrate how it would meet minimum stress test capital ratios. A credit union that passes the test would benefit from the analysis by identifying potential improvements in its enterprise risk management system.