Monday, October 31, 2011

Section 208 Net Worth Assistance Becomes Effective Today

Today, Section 208 assistance from NCUA can count as net worth for problem credit unions.

However, there are some of us that are worried that Section 208 assistance may be abused.

Marvin Umholtz expressed such concern in CU Strategic Hot Topics. He wrote:

"The NCUA Board would be relatively unrestricted in its ability to pick winners and losers by injecting or withholding financial assistance. Channeling NCUSIF dollars to pet credit unions to keep them afloat is not an appropriate long-term safety and soundness policy. Although this correspondent generally believes that regulators need to have a full tool box, Section 208 is based on the faulty premise that politicians, including the NCUA Board and their agency’s bureaucrats, will allocate capital better than the marketplace. One can hope that an uptick in the NCUA Board’s use of Section 208 does not lead to the creation of a too-sick-to-fail credit union supervisory culture. The folly of “pretend net worth” should be self evident, but the savings and loan crisis decades ago provided tangible evidence of how not and why not to do it. Delayed resolution is often much more costly."


This is why ABA had requested that this assistance only be used to facilitate a merger between a healthy credit union and a failing credit union.

As it currently stands, no one knows under what circumstances the agency will extend Section 208 assistance.

To minimize this potential for abuse, the agency needs to clearly articulate the rules of the road as to when such assistance would be extended. Rules are preferable to discretion.
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