By Lisa Hochgraf
The Honorable Debbie Matz just told attendees of CUES' Directors Conference in Palm Desert, Calif., that continued efforts to insulate members against the impacts of the economic crisis will mean additional payments, both to support the rebuilding of the corporate system and to support NCUA's 2010 budget increase.
Chairman of the NCUA Board, Matz emphasized that the recently publicized 2010 corporate payment estimate of 5 to 40 basis points is still the best estimate available. She said better numbers will likely not be available until fall.
In a difficult economic environment, there's a tendency to question a budget increase even one after eight years without one, Matz said, enumerating how the additional funds will be spent.
Training examination staff will be a key 2010 budget component, she noted. In addition, the next year includes plans to create an office of consumer protection that would review all NCUA regulations to ensure they are consumer friendly. The new office also would strive to help credit unions reach more consumers by advancing new national field of membership standards.
A second office, that of chief economist, would be created to watch the national economy and alert examiners to potential problems as early as possible.
Matz praised credit unions for the important role they have played in serving Americans during these difficult economic times. She celebrated the financial health now enjoyed by many U.S. credit unions.
About 98 percent of the 7,700 federally insured CUs are at least adequately capitalized, she noted; 96 percent are well capitalized.
"This is in no small part a tribute to your good decision-making to avoid the largely risky financial instruments that contributed to the meltdown," Matz said, noting that the future isn't all rosy.
"We all know this crisis could get worse," she continued. "In 2010 we're likely to see capital written down by corporates trickle down to natural person credit unions." She considered the "likelihood of negative earnings" as a real factor in the equation determining CUs' financial health, and said the "greatest cause for concern is the growing number and size of credit unions downgraded to CAMEL 4 and 5." The assets at credit unions with these lower ratings have almost doubled--and next year the number of failures is expected to rise, she said.
This is a time of "unprecedented peril for credit unions," Matz said. "The overwhelming majority are on solid ground, but the prospect of continued losses continues to pose a systemic risk."
Matz called the proposed corporate rule part of NCUA's effort to help credit unions emerge financially healthy on the other side of the crisis. She said the new rule would not be "prescriptive"--leaving many key decisions in the hands of credit unions, including whether fewer corporates will exist--or any at all. In the meantime, the new rule would help strengthen any existing corporates, she said.
Specifically, the new corporate rule would bolster capital standards by aligning corporates with BASEL I and subjecting them to leveraged capital requirements to assess quantifiable and non-quantifiable risk. In addition, corporates would face prompt corrective action. "Our goal is to prevent capital risk; we will also pursue aggressive PCA when necessary," she said. Matz said the work of rebuilding corporate capital will begin right away, but have a 10-year scope, with checkpoints at three and six years.
The new rule also will better describe corporate asset/liability management, including the gap betwen average life of assets and liabilities. It will prohibit accepting assets of long-term duration from one source.
The third part of the new corporate proposal seems to ensure corporates avoid excessive risk concentration in one type of asset. "Our projections have shown that if these new standards had already been in place, they would have mitigated" corporates' current investment problems, Matz said.
Finally, the new rule seeks to address corporate governance. Right now, there are no national training standards for corporate board members, she said. This aspect of the new rule would require corporate board members to be CEOs, CFOs or COOs at their credit union. This is a fitting indicator of a corporate director's expertise and motivation, Matz said.
She also promised careful examination of retail credit unions in the days ahead. Credit unions and NCUA have a shared goal of building a "firewall between the crisis we face and the individual members we serve," Matz said. This includes taking careful looks at fixed-rate loan concentrations held in portfolio; member business lending; and loan participations.
"Even if you are well capitalized, we will not wait 12 to 18 months. We will send an examiner in sooner," she said. "We will step up public actions. We're stepping up these actions to save as many credit unions as possible.
"Tough times call for tough love," she continued. "Our intention in all of these efforts is not to over-regulate or to play gotcha. The regulatory pendulum tends to swing wildly as the economic winds change. NCUA is your partner in safety and soundness. Our goal is to detect and solve problems before they become insurmountable.
"The impact on members has been very limited and it's our job to keep it that way," she concluded. "We cannot survive if the American people lose confidence in credit unions as a safe place to save and borrow."
Matz identified ways she believed the volunteer directors in attendance could help move the movement forward:
- Engage in diligent succession planning.
- Be active, well informed and visionary. "You should be questioning and challenging management's decisions," she said.
- Focus on new fields of membership and on diversity. "Make sure your board and staff reflect that diversity."
Lisa Hochgraf is a CUES editor.
