NCUA Will Not Disclose Stress Test Results

The National Credit Union Administration (NCUA) Board decided on April 24 to not publicize the stress test results for credit unions with $10 billion or more in assets; but stated that they may revisit its decision in three years.

The NCUA Board set forth several arguments against publishing the stress test results.

First, the Board noted that credit unions are cooperatives and not publicly held institutions. So, "the public policy goals of providing information to market participants and facilitating market discipline are of reduced importance in the case of credit unions."

Second, the Board believes that if the stress test results are published, these "results could be taken out of context or misreported in public media. This could lead members to faulty conclusions about their credit union’s current health, and cause a run on deposits."

I believe this concern by the Board is overblown. The Federal Reserve publishes the stress test results for large banks and there have not been any runs. In fact, the evidence would suggest that the disclosure of these results reduced market uncertainty and increased market confidence in these institutions.

Third, NCUA views the stress test as a supervisory tool akin to CAMEL Ratings, which are not published.

Fourth, NCUA is concerned that disclosing the results will put greater pressure on credit unions to always show positive outcomes. The agency worries that credit unions approved by NCUA to conduct their own stress tests after three years would alter their assumptions instead of raise additional capital, which subverts the purpose of the rule.

But shouldn't NCUA review the assumptions and models of these large credit unions to ensure that their assumptions and models are realistic?

In addition, the Board believes that the member and the public have adequate information about the the credit union's performance with the posting of current and past Call Reports on its website. Therefore, there is not need to disclose this stress test results.

However, the Call Report does not tell you the adequacy of the credit union's capital (net worth) under financial stress. I recognize that the stress test is a "what if" analysis; but it can be used by members and future members to assess the financial resiliency of these large credit unions.

I believe NCUA's decision to not publish the stress test results will in the long-run create more uncertainty. People will wonder what is NCUA hiding.