ALEXANDRIA, Va. – NCUA said last week that various stress tests applied to the credit union system supported its decision to assess a $1.1 billion premium on federally insured credit unions this year and points to the potential for additional charges through at least next year.
The stress tests include updated analysis of the impact of the distressed real estate market and of potential losses in the corporate system, according to Melinda Love, director of NCUA’s office of Insurance and Examinations. The analysis also included a new stress test similar to the Supervisory Capital Assessment Program that banking regulators applied to the biggest bank holding companies last spring.
The tests are not necessarily indicative of what NCUA predicts will happen but more a point of reference for contingency planning and setting reserve levels for the National CU Share Insurance Fund, Love told the NCUA Board prior to last week’s vote to assess a $1.06 billion, or 15 basis point, premium.
Under four scenarios:
* Testing of potential failures and losses due to distressed real estate markets shows an allocation of $32.5 billion of projected losses for natural person credit unions over the next two years resulting in 90 credit union failures and a worst case projection of $1.4 billion of losses for the NCUSIF;
* Measuring the potential of a complete write-off of all natural person credit union capital in corporate credit unions and the immediate assessment of a $7 billion liability for the corporate stabilization resulted in an allocation of $9.3 billion of losses for credit unions and a projection of 25 credit union failures presenting a maximum exposure of $80 million of losses for the NCUSIF;
* Adding the impact of the two scenarios, the declining real estate markets and the complete losses of corporate capital would result in a projected 227 credit union failures over two years and a maximum exposure of $6.4 billion of losses for the NCUSIF;
* Stress tests performed under the Treasury’s Supervisory Capital Assessment Program, which includes assumptions that included a deeper economic downturn, produced a baseline of $32.6 billion in losses resulting in 38 credit union failures over two years and a maximum loss for the NCUSIF of $557 million. The more adverse scenario resulted in an allocation of $56.4 billion in losses resulting in 519 credit union failures and a maximum exposure of $15.5 billion to the NCUSIF.
"While none of the scenarios are catastrophic for the credit union system, all indicators point to a rising number of credit union failures at least through 2010," said Love. "This is further compounded by the expected lower demand for mergers and acquisitions, which may lead to higher resolution cost on individual cases and an increased number of liquidations."
"The measurement of the maximum loss exposure calculated in this analysis is consistent with the results achieved through the credit risk analysis completed in the prior stress analysis," said Love. "The more adverse loss scenarios disclose potential risk to the NCUSIF."
"Overall, the analysis indicates the NCUSIF is sufficient to handle severe financial stresses on the credit union industry," Love told the NCUA Board. "However, the risk presented to the NCUSIF is increasing due to the exposure to potential losses in the corporate credit union system along with shifting asset concentrations and changes in credit union business models."
