LAKE BLUFF, Ill.-Without capital credit unions will not play a significant role in the nation's economic recovery and, moreover, a large number will fail if they cannot access some form of alternative capital.
That is a key finding of a "stress test" performed by Moebs $ervices on the entire financial industry that shows 2,289 natural person credit unions will need capital assistance in the coming years-to the tune of $19.1 billion. Some 5,386 banks will similarly need additional capital of $523 billion.
"We are in world of hurt," asserted Mike Moebs, Moebs $ervices economist and CEO. "We have 7,675 financial institutions out of 15,730-48.8%-short on capital. And they are short by $542 billion. Our stress test tells me that no one is letting us know how bad it is, not the NCUA, FDIC, the House and Senate banking committees, or the White House. When I take a look at the facts, 29.7% of credit unions need capital and 67.2% of the banks, can we now understand why we can't get jobs?"
Moebs $ervices' conclusions are based on financial institutions meeting an 8% minimum capital-to-asset benchmark. (See
The causes behind the erosion of capital at banks have been well documented. According to Moebs, two big reasons for credit unions' problems are that they have not managed the balance sheet as well as banks (see related story), and are unable to shrink assets due to the need to maintain liquidity to pay for additional assessments to bail out the corporate system and shore up the share insurance fund.
Limits on Lending
One offshoot of the latter scenario, noted Moebs, is that credit unions will not be able to drive additional revenue through increased lending since they have to maintain liquidity. "They cannot get into lending more aggressively, they must focus on high FICO scores, or they will run into heavy collection costs. They have to be extremely cautious in their lending because they can't afford to have any increase or impingement on their non-interest expenses. They are in difficult position."
The only thing credit unions can do, which is the same strategy being deployed by many banks, noted Moebs, is increase fee income. Contrary to many CU marketing campaigns that point fingers at banks for reaching into consumers' pockets, Moebs said call report data shows credit unions increased fee income by approximately 33% in 2009, the same pace as banks. "No one is talking about this," he said.
The Moebs stress test is based on what his company believes is the only analysis that incorporates all the nation's banks, savings banks, and credit unions. Moebs $ervices has maintained for more than 25 years what it said is statistically valid databases of pricing, expenses, and other balance sheet data on all banks and credit unions. "Our stress test is very unique," Moebs said. "We have not been able to find one source that has put all of these institutions together under one lens."
Moebs' stress test analyzes financials' call report data through year-end 2009, encompassing 15,730 financial institutions and reviewing numerous categories, including net interest margin, loan reserves, capital, investment portfolio, and the entire loan portfolio. In addition to not using the Treasury's original stress test minimum capital standard of 4%, Moebs' latest analysis also does not rely on the Fed's Treasury's values for investments and loans, which are now proven to be inaccurate, Moebs insisted.
Developing its own formula after analyzing market conditions and year-end 2009 bank and credit union delinquency reports, Moebs $ervices valued mortgage-backed securities at 75%, first mortgages at 96%, second mortgages at 100%, credit cards at 99%, other consumer loans at 99%, commercial real estate at 97%, and commercial loans at 99%. The Treasury's stress test last year valued mortgage backed securities at 100%, first and second mortgages and credit cards 92%, other consumer loans 90%, commercial real estate 100%, and commercial loans 95%.
Moebs stated that his firm has seen the bank and CU capital problem for some time, and that the only government office providing any degree of transparency is the Fed and its chairman, Ben Bernanke. "And the Fed is not being completely transparent either. They should say that half of our financial institutions are in trouble."
How Many to 'Bite the Dust?'
Moebs believes that banks and credit unions will eventually dig themselves out, but not before 1,000 to 1,800 banks and credit unions "bite the dust."
The quickest way out of the problem is to generate additional capital. Banks have the option of going to the market or turning to other sources for capital, but credit unions need some form of alternative capital, such as a debenture that can be called capital, Moebs recommended. Credit unions have cleaned up their balance sheets, doing a "superb job" with home equity, second mortgages, credit cards, and vehicle loans.
"They are not sitting on their hands," Moebs said. "They are trying to do the best they can, but they need help. It's not a handout. They want to redefine their capital. Allow them to plead their case to the private equity funds, get that debit in, retain their cooperative status, and shrink to be in a better position to make loans that are needed to create jobs. That's the bottom line."
A Look at Stress Tests
A stress test in which financial institutions must meet a minimum 8% capital-to-asset standard, and provides valuations of loans and assets based on call report data and the latest market conditions, provides the most "realistic" insights into bank and credit union stability, according to Mike Moebs, economist and CEO of Moebs $ervices. This is discussed in the story, above. However, his company has also run three other stress test scenarios using different capital standards and valuations of loans and assets.
Scenario #2: This evaluation uses the Treasury's 2009 stress test capital-to-asset benchmark of 4%, and all loans and investments are not impinged and represent original face value.
Result: Institutions needing capital assistance-160 banks for $4.1 billion and 73 CUs for $157 million.
"This is always the case," said Moebs. "We will always have 200 to 500 institutions having problems no matter how we measure this."
Scenario #3: This formula uses the Treasury's 4% capital-to-asset benchmark and the agency's assumptions on investments and loans it made in last year's stress test: MBS was valued at 100%, first and second mortgages and credit cards 92%, other consumer loans 90% (this is mostly vehicle loans), commercial real estate 100%, and commercial loans 95%.
Result: Institutions needing capital assistance-746 banks for $73 billion and 2,234 CUs for $11.5 billion.
"The main reason for the large number of credit unions in this scenario is vehicle loans, which are valued at 90%," Moebs said. "Credit unions got severely hit with repossessions last year."
Scenario #4: This analysis relies on end-of-year 2009 Call Report data, along with supplemental information-primarily analysis of the current MBS investment market and year-end CU and bank delinquency reports. Investment and loan values were set at 75% for MBS, 96% for first mortgages, 100% on second mortgages, 99% for credit cards, 99% for other consumer loans, 97% for commercial real estate 97%, and 99% on commercial loans. Treasury 's 4% capital-to-asset benchmark is used.
Result: Institutions needing capital assistance-1,628 banks for $177 billion and 393 CUs for $3.7 billion.
"About one year later, you can see how inaccurate the Fed Treasury was in their stress test predictions for investment and loan values," Moebs pointed out.
