Wednesday, January 5, 2011

Will Emergency Mergers Increase in 2011?

The pace of emergency or involuntary mergers by National Credit Union Administration (NCUA) should increase in 2011.

The Federal Credit Union Act gives NCUA the authority to perform an emergency merger if it determines that a credit union is insolvent or in danger of becoming insolvent and the the NCUA Board finds that an emergency requiring expeditious action exists, no other reasonable alternatives are available, and the action is in the public interest.

The reason why I believe there will be an increase in emergency mergers is that in the last year changes in the regulatory and legislative landscapes have made emergency mergers easier to do.

First, at the end of the 111th Congress, a bill (S. 4036) passed Congress that amended the definition of net worth allowing capital assistance to a troubled credit union provided by NCUA under Section 208 to count as net worth. This capital assistance will make these troubled credit unions more attractive as merger partners.

Second, in June of last year, NCUA created three categories under which a credit union would meet the standard of being "in danger of insolvency" as part of the agency's emergency merger powers.

1. The credit union’s net worth is declining at a rate that will render it insolvent within 24 months.

2. The credit union’s net worth is declining at a rate that will take it under
two percent net worth within 12 months.

3. The credit union’s net worth is significantly undercapitalized -- net worth ratio between 2 percent and less than 4 percent -- and NCUA determines that there is no reasonable prospect of the credit union becoming adequately capitalized (net worth ratio of at least 6 percent) in the succeeding 36 months.

When these objective measures of "in danger of insolvency" are combined with the new legislative authority to provide capital assistance, the result should be an acceleration in the pace of emergency mergers by NCUA.

2 comments:

  1. maybe you can help clear something up. exactly what is the capital infusion?
    a loan that has to be paid back by the acquierer?
    or, permanent capital that is funded by assessing cu's?
    doesnt seem as though ncua has all kinds of capital to provide...

    ReplyDelete
  2. Dear Anonymous:

    You ask an excellent question. Unfortunately at this time, the nature of this capital infusion has not been defined.

    ReplyDelete

 

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