Implications? Regulators Downplay News

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WASHINGTON, D.C.-Both federal and state regulators are downplaying any regulatory implications for credit unions following the U.S. credit downgrade and subsequent market turmoil.

Buddy Gill, NCUA's senior strategic communications and external relations advisor, emphasized that the agency is "not going to treat the risk-weighted security of Treasuries that credit unions are holding any differently because of the downgrade."

"The real question," said Gill, "is what impact does this have on the corporate stabilization program, and the answer is: none."

Gill added that "The securities involved in that are all out there, they've been issued, so there's no new bottom line costs added to the stabilization fund."

A letter from NCUA Chairman Debbie Matz last week reasserted Gill's statements, but chiefly addressed the potential impact on share and loan demand, including the possibility of balance sheet fluctuations. In the event of declines in regulatory capital levels, Matz recommended that CUs contact NCUA or state authorities for guidance.

At the state level, National Association of State Credit Union Supervisors (NASCUS) President and CEO Mary Martha Fortney expressed concern that interest rates-particularly for mortgages and credit cards-could continue to rise, but emphasized that "I don't think the sky is falling."

In the meantime, said Fortney, "Regulators are telling credit unions that they need to continue with their due diligence. They need to try-as difficult as this may be-to do long range planning and look beyond what's happening today, but look further out." Fortney stressed that all credit unions would continue to be scrutinized by regulators at both the state and federal level, but emphasized that regulators are also telling CUs "to give them a call and contact them if they're having times of trouble."

With credit unions facing the possibility of surging deposits and changes to their net worth, Fortney repeated NASCUS' call for legislative change that would allow credit unions to accept supplemental capital, adding that CUs "should be prepared for the consequences" should their net worth fall below 6%.

One Regulator's Perspective

Orla Beth Peck, supervisor of credit unions at the Utah Department of Financial Institutions and NASCUS's chairman-elect, said that from the perspective of a state regulator, "flight to quality" deposits remain the real threat. "That's a really tough issue for credit unions...because they can lower their dividend rate so that it's below market, and yet the money will still come in," said Peck.

For credit unions with capital ratios hovering just above PCA thresholds, she recommended lowering dividends and examining budgets to trim as much fat as possible.

Peck also noted that regulators often worry about declining credit quality of loans when deposits surge, but noted that officials in Utah were taking a wait-and-see approach on that matter, adding that the credit quality issue is not unique to the current environment.

Peck added that her agency is keeping a close watch on interest rate risk, and said that because of the possibility of inflation, "we've been recommending that credit unions look at their balance sheet now and have it in as good a position as they possibly can."

Taking the long view, she observed that the Fed's recent comments on extending low interest rates through 2013 should not alter the way CUs plan, adding that credit unions have been through these cycles before. In fact, she noted, credit unions' average capital ratios now are better than what they were during the recession of the 1980s.

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