Tuesday, April 5, 2011

Be Careful What You Wish For

I would like to pose the following hypothetical question: What would have happened to the National Credit Union Share Insurance Fund (NCUSIF) and the premiums paid by credit unions in the aftermath of the recession of 2008 and 2009, if there was never a business loan cap?

In other words, assume that the business loan cap of 12.25 percent of assets, which was put in place in 1998, never happened.

I think we would agree that the risk profile of the credit union industry would look fundamentally different in this counter factual world, as credit unions would take on more credit risk and concentration risk. [For example, NCUA is reporting that 3.92 percent of all business loans were delinquent at the end of 2010, which is well above the overall delinquency rate of 1.74 percent.]

Without the business loan cap, it is likely that more credit unions would have had greater exposure to business loans entering the recession of 2008 and 2009, especially commercial real estate and construction loans. This means that those credit unions would have more of their net worth at risk because of the greater concentration in business loans; and would be more exposed to the economic contraction.

As a result of the economic downturn, the dollar volume of delinquencies and charge-offs associated with business loans would increase.

This would probably result in more credit union failures and larger losses for the NCUSIF.

So, the surviving credit unions would see higher premium assessments to restore the NCUSIF back to its normal operating level. There is also the likelihood that insured credit unions would have to expense a portion (and possibly all) of their NCUSIF one percent capitalization deposit as the NCUSIF reserve ratio falls below one percent. This expensing of the one percent deposit would reduce the net worth ratios of these surviving credit unions.

What makes this even worse is that the current flat rate premium assessment system means that sound credit unions would be cross-subsidizing the riskier credit unions. In other words, the less risky credit unions are bearing the cost of the risk assumed by credit unions that took on more credit risk and concentration risk associated with increased business lending.

Therefore, the member business loan cap of 12.25 percent of assets provided a real tangible benefit to credit unions. It limited the losses to the NCUSIF and resulted in smaller premium assessments than what would have been the case if the business loan cap had never been in place.

So while a few credit unions would benefit from the legislative push to increase the business lending authority of credit unions, legislation to raise the business lending cap will ultimately impose greater cost through higher future NCUSIF premiums on most credit unions that have no interest in this increased lending authority.


  1. And to effectively analyze the issue, one has to realize if credit unions were able to business lend as they had for 75+ years prior....their corporates would not have been awash in liquidity. Which would lead us to smaller losses for the NCUSIF as corporates would not have to be so heavy in mortgage backed securities. Funny how data can be spun in both directions.

  2. Then again, with changes in banking law, the biggest banks got larger and larger making them REALLY "too big to fail" requiring billions and billions of dollars in assistance from the Federal Reserve and Treasury. Maybe GLB was not good for banks as a result.

  3. I love reading the posts offered by Keith. He is just so geniune in his concern for the well-being of the credit union industry. I would like to personally thank you for your wise counsel. If it wasn't for your advice, those terrible credit unions might be lending to small business owners and entrepreneurs - which we all know to be the bane of modern society. Plus, those greedy credit unions are so driven by their desire to help people that they are getting in the way of the big banks efforts to line the pockets of shareholders.

    Thankfully the world has someone as altruistic as Dr. Keith to post this cautionary message. His word will someday protect the credit union movement from disaster. After all, it is clear that his top priority in life to to promote the welfare of credit unions even if must come at the slightest expense of banking industry. Please keep in mind that banks are very small players in a world dominated by the credit union giants.

    If only credit unions would follow the gospel of Leggett, perhaps they would be as stable and financially strong as a bank. After all, I haven't heard of a bank failure since I started typing this comment.

    Geez Goliath - when are you going to stop messing with David and focus on your own problems...

    This guy is a joke!



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