Navy FCU and Nonbank SIFIs

Is Navy Federal Credit Union a nonbank systemically important financial institution (SIFI)?

Dodd-Frank Act requires designated nonbank SIFIs to be supervised by the Board of Governors and subject to prudential standards.

Title I of the Dodd-Frank Act defines a “nonbank financial company” as a domestic or foreign company that is “predominantly engaged in financial activities,” other than bank holding companies and certain other types of firms.

The Financial Stability Oversight Council analyzes three factors -- size, interconnectedness, and substitutability -- when making the determination to designate a nonbank financial company as a SIFI and to subject the entity to Federal Reserve supervision.

I think we can all agree that Navy is predominately engaged in financial activities. Thus, it is a nonbank financial company.

Navy FCU has consolidated assets of $51.6 billion, as of September 2012. This is in excess of $50 billion size threshold used to determine whether a nonbank financial company is a SIFI.

Navy FCU is also systemically important to the National Credit Union Share Insurance Fund (NCUSIF) and the credit union industry. As of July 2012, the NCUSIF had approximately $10.95 billion in equity. This means that Navy FCU is almost 4.5 times larger than the NCUSIF. The failure of Navy FCU could swamp the resources of the NCUSIF and would likely cause federally-insured credit unions to expense their one percent NCUSIF capitalization deposit, as this asset becomes impaired. This impairment charge would cause credit unions to contract lending and other services.

As NCUA Chairman Fryzel testified in 2009 regarding the creation of the Temporary Corporate Credit Union Stabilization Fund to handle the failure of several corporate credit unions, "the current structure of the NCUSIF requires that credit unions take all these insurance expense charges at once, which would result in a contraction of credit union lending and other services...such a large, sudden impact on credit unions’ financial statements could further destabilize consumer confidence."

The same applies to Navy FCU. As Henry Meier, Associate General Counsel for the Credit Union Association of New York, recently wrote on his blog, New York's State of Mind, "the biggest credit unions pose the greatest risk to the most credit unions." So, the failure of Navy FCU would most likely have a destabilizing impact on the $1 trillion credit union industry.

Navy FCU is an important source of credit to civilian Department of Defense employees and enlisted personnel in our Armed Forces. The failure of Navy FCU could potentially affect the availability of credit to this community in the short run. although in the long-run I believe other competitors would fill the void.

Furthermore, the National Credit Union Administration is not designated as a primary financial regulatory agency by Title I of the Dodd-Frank Act. In determining whether a nonbank finacial company should be regulated by the Federal Reserve, the Financial Stability Oversight Council will look at the degree to which the company is already regulated by 1 or more primary financial regulatory agencies.

While I don't know if the Financial Stability Oversigt Council will make the determination that Navy FCU is a nonbank SIFI subject to Federal Reserve supervision, I believe there is enough evidence to support such a finding.