Analyst Predicts 11% Capital Minimum Coming

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LAKE BLUFF, Ill.-In the near future credit unions will need to meet an 11% capital minimum to be considered well-capitalized, which could mean job reductions in excess of 50,000 and the end of the independent share insurance fund, according to one analyst.

But not everyone believes the situation will be so dire, although several analysts have withheld expressing an opinion of their own, and CUNA has indicated some sort of increased capital requirements may be in the offing.

Mike Moebs, CEO and economist of Moebs $ervices, told Credit Union Journal that credit union concerns over the Durbin Amendment are small when compared to a looming issue CUs face over the next two years-a need to produce an additional $5.4 billion in annual earnings overall to be considered well capitalized. Moebs said the best way to accomplish the task, with earnings down due largely to corporate assessments, is to cut expenses, including jobs.

Moebs asserted that an 11% capital requirement will be placed on credit unions and makes the bold prediction that the National Credit Union Share Insurance Fund will be rolled into the FDIC.

Moebs' argument to support what he believes will be the new CU capital standard is the economic crisis has already prompted the FDIC to raise the minimum capital standard for too-big-to fail banks to 7% from 4%.

Feeling It On Main Street

"If the too-big-to-fail banks are being required to move to a capital standard three full points higher, so will the Main Street institutions-the credit unions and community banks," said Moebs. "Capital standards will go from 8% (CAMEL 1 standard) to 11%. This is the approach (Treasury Secretary Timonthy) Geitner, (Fed Chairman Ben) Bernanke, and (and former British PM Tony) Blair established in the discussions with the Europeans last summer."

But how likely is that 11% minimum capital requirement? Economists at CUNA Mutual Group and NAFCU declined to offer an opinion on the issue, while CUNA weighed in saying higher capital standards are not out of the question.

Despite the larger number of bank failures than credit unions during the recession, Moebs contended the credit union insurance fund will be merged with banks' due to NCUA's poor management of the corporate system, the negative view of NCUA and credit unions in a 2010 Treasury report, and a view from the Fed that regulatory consolidation is a good idea.

"No one is saying it, so I will: the new number for credit unions and community banks will be 11% capital to assets," stated Moebs, expecting the consolidation of the financial system and new capital requirement will start to take shape in the next 12 months. But Moebs insisted the signs are already there. "A couple dozen credit unions I have met with in the past few months have told me examiners are saying they have to get capital above 10%."

CUNA's Chief Economist, Bill HampeI, said he would not be surprised to find some examiners encouraging capital ratio building, "especially as we come out of a financial crisis and harsh recession. Beyond the 7% threshold to be well capitalized, the amount of necessary capital for any credit union depends on its specific risk profile and growth prospects. I suspect examiners have those factors in mind when suggesting capital ratio targets."

Todd Harper, chief spokesperson for NCUA, told Credit Union Journal, "As our examiners look at a credit union they will work to make sure that a credit union's net worth is commensurate with the risk on the balance sheet. For a credit union with a simple balance sheet, 7% may be enough capital. But if the CU has a more complex balance sheet, is engaged in riskier activities, or has a FOM that has seasonal changes, it may need to have higher capital."

Digging into numbers, Moebs outlined the problem he said is facing credit unions. With about $90 billion in total industry capital, CUs today have slightly below 10% capital to assets overall-about $9 billion short of reaching 11%. "In round numbers credit unions made $4 billion last year, so they need to add another $5 billion."

Need For Expense Reduction

Ruling out net interest margin as a means of driving additional revenue in the near term, Moebs said the only remaining options are increasing fees, reducing expenses, or shrinking assets.

Adding fees or shrinking asset size are not good choices at a time when CUs have a chance to take banks' business, he said.

"I think credit unions, as an industry, can become much more efficient and reduce 20% of their expenses, which comes to about $5.8 billion and will raise capital to a level that will be eventually required. Half of that number is going to come from reducing employees. With about 305,000 FTEs among credit unions, that's 52,000 employees. Credit unions have to get their employee structure down to one employee for every $6 million in assets. That means everyone, from the local fire department credit union to Navy Federal."

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