LAKE BLUFF, Ill.-Should credit unions surpass $1 trillion in assets during 2012, it will prove to be a strong indicator of the growth CUs have seen, as many began their lives in cigar boxes. But the growth is coming with some strong challenges.
On face value, $1 trillion in assets is a remarkable accomplishment, said Michael Moebs. "The credit union brand is successful and strong." But the economist and CEO of Moebs $ervices in Lake Bluff, Ill., questions whether reaching $1 trillion is the best thing for credit unions.
"With growth in assets and membership comes some difficulty," Moebs told Credit Union Journal. "Without stronger earnings increasing capital, growth could be curtailed. Credit unions must reduce expenses and increase fees. The reason for this is rates are too low, and it appears from the Federal Reserve Open Market Committee's announcement last week that rates will remain very low into 2014. With overall assessments for corporate credit unions amounting to about .22% of assets, this substantially hurts earnings and the ability to increase capital."
Adding To The Challenge
Adding to credit unions' difficulties, asserted Moebs, is the fact that the dollar amount of the corporate systems' problems is much bigger than what is being stated by NCUA, and that credit unions-like banks-under TARP guidelines do not have to mark their investments to market.
"These are enormous hurdles for the credit union movement," insisted Moebs. "If the problems presented by these two 800-pound gorillas-which no one wants to talk about-are not solved soon, CU growth would have to be curtailed and assets shrunk below the $1-trillion mark in order to maintain appropriate levels of capital."
Looking at natural-person credit union investments, Moebs outlined part of the problem. According to Q3 2011 Call Report data, credit unions have $258.4 billion in investments, most of it in mortgage-backed securities-either GSE debt, GSE MBS, or privately issued MBS, Moebs said. "Let's take the high end of mark-to-market, say the securities' value drops 15%. Fifteen percent of $258 billion is $39 billion. Subtract $39 billion from $96.4 billion, total capital for natural person CUs, and you get $57.4 billion. Now divide that number by credit unions' current assets ($963.4 billion) and you end up with 6% capital."
Moebs believes credit unions today should be at 8% capital or better, and will soon have to reach 11%, as higher capital standards are coming. Moebs asserted that an 11% capital requirement will be placed on credit unions by the FDIC after the NCUSIF is rolled into the bank fund (Credit Union Journal, May 9, 2011).
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%, and the agency's thinking that a greater capital cushion is needed to avoid future problems will be applied to CUs, as well. Moebs believes the European economic crisis will boil over into the U.S. and is what the FDIC, OCC, and the Fed are preparing depositories to overcome.
Seeing that credit unions can't grow their way out of this problem Moebs contended that credit unions must reduce expenses, cut jobs, tighten lending standards, and discourage deposits.
Not All Agree
CUNA Senior Economist Mike Schenk, however, does not foresee the same future, citing credit unions' strong collective capital position at 10.2%. "The industry is in good shape despite the recent economic troubles. This year we are on track to earn 60 to 65 basis points ROA overall and next year that will be roughly 15 to 20 basis points higher," said Schenk. "Plus, NCUA in the letter they sent out in September stated that estimated losses in corporate credit union legacy assets are actually substantially lower than previously thought."
But Moebs does not share that position. "The corporate problem is big and not having to mark to market credit unions investment portfolios is masking another problem. Credit unions need to reduce their size and with that comes big expense cuts including jobs. No one wants this to happen, especially the White House in an election year. So without a combination of expense cuts and increased fees, will we be left with using cigar boxes again?"
