CHICAGO-NCUA is concerned many credit unions are not concentrating on the full extent of their concentration risk.
"The failures we have ben dealing with over the past few years, you can really narrow down to concentration risk issues," said John Kutchey, deputy director of NCUA's Office of Examination and Insurance. "NCUA is emphasizing this area of review in relation to the total risk of each credit union (Letter to CUs 10-CU-03). We've been dealing with concentration risks beyond your specific CU for some time. Since 2000, we are down 30% in the number of credit unions (in the U.S), yet assets have doubled, so there is a lot more risk and size in specific credit unions."
Kutchey, who said he anticipates there will be several more liquidations of good-sized CUs in 2010, noted, "We tell our staff all the time, 'Too much of anything is too much.'"
Some areas of worry over "too much" include real estate loans, which comprise 54% of loan dollars currently outstanding within credit unions (up from 38.7% in 2000); net long term assets to assets, now at 31.5%, and the percentage of regular shares to total shares, which stands at 34.2%.
"We are asking credit unions to aggregate their risks," stressed Kutchey. He noted in remarks before NAFCU's annual meeting, for instance, that 9% of all member business lending is tied to some sort of rel estate, as are many loan participations.
What the agency wants to see, he said, is credit unions measuring risk by product/service in totality to net worth; doing ongoing monitoring and measurement of risk as internal and external conditions change, and doing measuring and monitoring consistent with size complexity.
"If you have 10% of our assets in real estate, the level of sophisitication needed is not that detailed. But if you've got 50% of yoru balance sheet in RE, your monitoring and measuring systems need to be sophisticated."
Oversight Management Vital
Another key point, Kutchey said, is oversight of management. "A key point is the board is responsible for the risk taken by the institution," said Kutchey. "When we come in we look at the board of directors. Where we are seeing failures at this point we are also seeing board members who either didn't ask the questions or, more of a concern to us, didn't know what questions to ask. They need basic financial literacy and knowledge."
As for management teams, he added, "We do wonder if the larger credit unions have the means in place to measure the risks they are taking, and, speaking very frankly, they are not prepared for some of the stuff that is now hitting them."
Kutchey said the agency is taking more of a "big picture look" at credit unions and finding that seldom does a credit union "take all of its risks together and (conside) how many times overall have you committed your net worth."
