Opinion: 'Capital Dilemma' Report Calls For Clarification

A report on the Feb. 8 "CU Journal Daily Briefing" cries out for a strong dose of clarification to illustrate how credit union net worth levels really affect credit unions-and not leave your readers with a misguided view of what is happening.

The item, headlined "Glut of CU Cash Poses a Capital Dilemma," stated that high levels of credit union "reserves" are creating a "dilemma" for credit union advocates like CUNA, which "is lobbying to ease current capital (net worth) requirements."

First of all, the headline of the item is very misleading. High net worth or capital ratios have ABSOLUTELY NOTHING to do with cash. By referring to cash, the headline implies that credit unions may be sitting on cash instead of lending to members. But the fact is that the loan to savings ratio at credit unions is the highest it has been in 25 years, at 82.8 percent.

Further, the Journal quotes me as saying that the amount of capital in credit unions is too high. I stand by that statement. Given the low-risk management practices of the typical credit union-practices which result from the cooperative structure-net worth levels of more than 10 percent are hard to characterize as "necessary." A higher than necessary net worth ratio means that a credit union has operated at a higher than necessary level of net income, and/or has grown very slowly. Both of these conditions have been and are present in credit unions, and they are interrelated. Trying to maintain a higher than necessary net income level requires doing things like charging more than necessary for loans and other services, and/or paying less than necessary on savings, all of which tend to deter growth. Of course, reasonable people can and do differ on just what is the meaning of "necessary."

However, instead of acknowledging these conditions, your report in what seems to be an attempt to stoke controversy, albeit contrived, has tried to turn this into a credit union vs. bank issue. The Journal reports a comment from Keith Leggett of the American Bankers Association that "high net worth ratios mean PCA (prompt corrective action) reform is not necessary." That is hogwash.

Here's the connection as I see it between current net worth ratios and PCA reform:

Most credit unions have very high net worth ratios, substantially above the legislatively mandated requirements. In that sense, most credit unions may not individually feel a need for immediate PCA reform, although they likely see the wisdom of it in the longer term.

Part of the reason that credit unions hold too much capital is that PCA requirements are too high. Whatever the level that PCA sets for a credit union to be "adequately" or "well capitalized," a credit union will attempt to maintain a sufficient buffer above those levels because the penalties for becoming inadequately capitalized are severe. So, if we modernize, rationalize or reform (pick your own verb) PCA, we will reduce one of the incentives for CUs to be so overcapitalized. Both would be good things, in any event.

In summary, the vast majority of credit unions will never be satisfied maintaining capital ratios merely at the "well capitalized" level. They will always want to hold more. This is all the more reason for that mandated level not to be too high.

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