ALEXANDRIA, Va. NCUA Board Chairman Debbie Matz on Thursday said while she is pleased with macroeconomic developments and their positive effects on credit unions, she has several concerns.
During a NCUA town hall meeting, hosted via Webinar, Matz told listeners the recovery is “well underway,” adding she was “really pleased” to report credit union loans have grown for seven straight quarters. She said the positive trends are due to hard work on the part of people at credit unions, along with improvements in the overall economy, plus prudent oversight from the regulator.
The downside, she immediately cautioned, is large CUs are driving growth. “It is troubling to me that small credit unions are losing members and losing money,” she said. “Many are losing capital, which puts them in danger of falling into PCA territory. We have found once a small credit union falls below 7% capital, it is very difficult for them to recover. Our Office of Small Credit Union Initiatives is working with many small credit unions on their net worth restoration plans.”
Because only 21% of small CUs are able to restore their net worth back over 7% once they fall below that level, Matz said she “strongly” encourages small credit unions to maintain their capital well above 7% so they have cushion against losses.
Credit Union Journal has been spotlighting this “Great Divide” between small and large credit unions throughout 2013 (See CU Journal Jan. 14
Many Risks Loom
Matz said NCUA’s recently proposed risk-based capital requirements will result in higher capital level requirements for credit unions that deliberately take on more risk. “The top risk today is interest rate risk,” she declared, asserting some CUs are not reducing concentration of long-term real estate loans. “It is imperative that management and boards are planning for interest rate risk.”
As a result of an extended period of low rates, Matz said some credit unions understandably have been reaching out to try to get more yield. Although many have turned to private student loans for this purpose, she warned those are not backed by the full faith of the U.S. government. “If a credit union offers private student loans, it must do due diligence and limit exposure.”
Another risk that concerns Matz is liquidity risk, especially given emergency liquidity for the industry has shrunk from $50 billion to $2 billion with the closure of U.S. Central. She said the Fed Discount Window and Central Liquidity Fund are options, but urged credit unions not wait for crisis to prepare.
At its May meeting, the NCUA Board proposed a rule on derivatives. Matz said these will be an “important tool” to provide a hedge against interest rate risk, but said CUs only will have “plain vanilla” options. Each credit union that is interested in derivatives will have to complete an application that would be reviewed by NCUA Regional Office. “We at NCUA need to make sure we have a well-trained staff to oversee these derivatives, which is expensive,” she said. A comment period is open until July 29 for credit unions to weigh in on charging all CUs for derivative oversight by using funds from the general NCUA budget, or by charging an application fee, Matz explained.
