NCUA Overusing Systemic Risk

The National Credit Union Administration (NCUA) has become very fond of tossing about the term "systemic risk" when justifying changes to its regulations.

Sometimes the use of systemic risk is warranted, as in the case of the new corporate credit union regulations. But in other cases, it appears that the this agency has not done the necessary analysis to justify the regulatory change -- so it leans on systemic risk as a justification for the regulatory changes.

The latest example is where the agency justifies it loan participation proposal by stating that "loan participations ... create more systemic risk to the share insurance fund (NCUSIF) due to the resulting interconnection between participants."

I will grant you that loan participations result in greater interconnectiveness between participants; but do loan participations at federally-insured credit unions really rise to the level of systemic importance to the NCUSIF?

According to NCUA, 1,458 federally-insured credit unions reported almost $12.8 billion in outstanding loan participations at the end of the third quarter. This is equal to 2.25 percent of the industry's loan balances.

In addition, there are 117 federally-insured credit unions that have outstanding loan participations (lines 691E and 691L from the Call Report) in excess of their net worth. Outstanding loan participations at these credit unions equal $3.2 billion.

There are only 20 credit unions with a risk exposure greater than 300 percent of their net worth with approximately $764 million in outstandings.

While I recognize that some credit unions have gotten into trouble due to loan participations, I don't believe that at this time loan participations represent a systemic threat to the NCUSIF.