Filene Report Overlooks Role Capital Plays As A CU’s First Defense Against Times Of Crisis
As I read the article on Professor Jackson’s recent Filene research paper on credit union capital in the Dec. 10 issue I couldn’t help but wonder what conclusions might be different if the selected base line of 1990 had been, say 1980 when the Carter year’s inflation peaked.
I all too well remember the effects of the 1969-82 inflation (and misery index) rates had on individuals, credit unions, the Savings & Loan mess and so forth. At one point I was paying 21% interest on a mortgage and watching all sorts of defaults happening all around, including very large credit union and bank bad debt write-offs. The credit union was paying greater interest rates while losing large sums on the fixed return investment portfolio, a most unpleasant situation indeed.
If today’s GAAP mark-to-market portfolio requirements were in effect during that same period many, many more credit unions and banks would have been showing deficit capital and would have been placed in the hands of the receivers. It was not a fun time for volunteers or management alike in CU’s or other financial institutions as huge losses were apparent in the fixed return investments, be it mortgages or governments, if liquidated.
Can’t happen again? I don’t believe that for a millisecond. At the worst of the Carter inflation years we experienced a 13 percentage point rise in 13 months! That was a lot for the U.S., but something that other countries have experienced sufficiently often that we should study what happens to them.
At our credit union we test what would happen to our member’s capital if we were to again experience a 13/13 event, rather than rely on lesser stress testing. Stewardship occasionally requires some seemingly out-of-the-mainstream decisions, and maintaining a sound capital base that can withstand a reoccurrence of a 13/13 event is one.
That capital base we hope will enable us to scramble to cope with the unexpected and unplanned-for events, all the while ensuring that we will be able to maintain sufficient sound capital that our CU will continue to exist and thrive, as is our responsibility to our member/owners.
Does the capital “belong” to the current member/owners? Not unless one believes that the capital of a for-profit corporation ‘belongs’ to the stockholders. In the CU the accumulation of the capital reaches back to the earliest beginnings when those long dead members made their initial deposits. It has changed over time as the net result of the interactions of a mini-slice of each and every transaction ever entered into, deposits, loans, charge-offs, bricks and mortar additions, etc. Is it all cash? No, but some portion of the capital account is earning returns for the benefit of the member/owners.
What’s the role of our capital? In my view our capital is the first-line insurance defense that will enable the credit union to survive as an entity, not being taken over by the regulators. The NCUSIF insurance is the second-line defense as it protects the member/owners accounts, but not the entity of the credit union, it’s employees and volunteers, nor members accounts in excess of the NCUSIF limits.
It will be interesting to observe the effect of the sub-prime mortgage mess on CU capital accounts and attitudes about capital levels, as it plays out over the next few years. Let’s hope the credit union industry doesn’t need the infusions of cash to shore up their capital base some other financial institutions have recently needed, with more to undoubtedly follow.
Filene can do better.
Evans M. Harrell, Director, LGECCU (formerly Lockheed Georgia Employees FCU), Marietta, Ga.