"Playing for keeps" with your money?
If you read the post, Credit Unions: A Capital Idea In Decline?, you noted that talking about credit union capital/reserves/equity can raise a lot of questions. Capital is an issue poorly understood by CU members, by most CU board members, and by many CU professionals. [Even "troll-twitterers" have a high propensity to go off half-crocked on capital!]
We want to get back to "The Godfather Mergers" series [link] because that's where most of the CU capital mayhem and shake-down is occurring. But, we have paused to discuss when a credit union has enough capital and how that is determined - using SECU as an example.
Credit unions are heavily regulated and insured by the federal government. As, you might suspect, federal law and regulation prescribe CU capital requirements - compliance is not optional! Federal law requires a 7%+ capital/reserves ratio for a CU to be considered "well-capitalized" (the highest level). An excellent way to estimate this capital requirement is to simply multiply 7% times the total assets of the credit union. In the case of SECU, that would be 7% x $55 billion in assets = a $3.85 billion well-capitalized reserve requirement.
The second principal capital measure is a regulatory requirement that a CU keep capital/reserves greater than 10+% of "risk weighted assets". Not all assets of a CU - which are mostly loans and investments - have the same risk of loss for a CU. So each category of asset is assigned a potential "risk weighting". Some assets are weighted more, some less that that required 7% legal capital requirement. CUs running riskier operations are required to hold higher capital/reserves, which makes great common and financial sense.
A CU must meet both measurements to be considered well-capitalized. The 7% "well-capitalized" capital/reserves requirement is a statutory (legal) requirement; the "risk-weighted" 10+% "well-capitalized" requirement is a much more refined analysis of actual risk exposure at a CU.
Look back at the post above [link]. You'll see that SECU over decades managed capital/reserves to that 7% level (within a 6% to 8% range). Well, what about the other "risk-weighted" capital ratio? Where was it? Did it fall below 10+% in 2008/2009?
😎 Just how risky is SECU?
Part of the reason for this post was the claim by several "troll-twitterers" that managing SECU to the 7% well-capitalized target was too risky.... the proof being the crash to 6.97%/6.83% in 2008/2009.
ReplyDeleteThink you ought to put that little troll out with the trash, here's why:
1) You'll remember that the SECU board-approved capital range was 6% to 8%. So, falling below the 7% target was a possibility anticipated, considered and acceptable to SECU. Falling below 7% was also legal and provided for under federal law. The only "penalty" imposed is that a CU have a plan to get back to 7% - SECU easily did.
2) "Just how risky is SECU"? Financially, SECU isn't risky, never has been. Capital levels are currently 1) over 10% (minimum 7%) on the legal measure, and 2) over 20% (10% minimum) on the risk measure.
3) Why is having a 20%+ risk capital ratio advantageous to SECU members, when 10% is enough?
4) How about in a merger? Where does the excess capital go?
Setting a policy down to 6% is irresponsible
DeleteWith #3, you're making a false assumption and asking the wrong question. There is the minimum level of 7% and 10% for RBC. Minimum is not synonymous with "enough" Having 20% RBC or 2x the minimum is disadvantageous. This is a byproduct of being so heavily concentrated in mortgages - which, outside of cash and most gov't securities is the lowest risk weighted asset class
DeleteWhere does excess capital go in a merger? To all the members of the new combined credit union. T
Delete10:23am Could you share with us how you arrived at that conclusion?
DeleteIf you can...
12: 12pm Same sort of question:
Delete1) Why is 7% not "enough"? It seemed to work well for decades at SECU. What is "enough"?
2) Why is 20% RBC "disadvantageous"? At least you're acknowledging that a credit union can have too much capital! How much "excess capital" is held between the 10% requirement and the 20%?
Thanks for sharing.
10:23am/2/15pm Because setting a board policy that makes being below well-capitalized unnecessarily subjects to the CU to regulatory risk
Delete2:30 pm Not according to federal law, which fully anticipates and accepts the fact that a credit union may fall below 7% and still would be adequately law - no penalties are imposed.
DeleteIs SECU better off following troll think or federal law?
2:35, we know you have a casual relationship with the facts, and that you're simple mind requires simplicity, but very few things are as simple as you paint them to be.
DeleteWhen a CU drops < 7%, the regulator authority under PCA expands a lot. There is no automatic "penalty" or action (and for the record, never said there was). Among the actions might be, heightened supervision, more frequent exams, increased examiner scrutiny, require a capital restoration plan, they can restrict asset growth, new products, require more earnings retention (e.g. lower deposits rates), etc. They have statutory authority to do these things at their whim and discretion, and they have no formal obligation to negotiate or justify these things.
Hope that helps you. But sure, let's hear us tell us that regulators don't have this authority under PCA rules for less then well-capitalized CU's.
10:13 pm Trolltwit Alert!!! Mr. Ridiculous, suffers yet another bout with foot-in-mirror disease.
DeleteHere's what federal law says is required if a credit union becomes "adequately capitalized" (falling below that 7% target):
"If a credit union’s capital classification falls below well capitalized to adequately capitalized or lower, credit unions must follow § 702.106, to meet the earnings retention requirements."
That's it! Here's where you can find 1) the law - 702.106, and 2) the explanation....
1) https://www.ecfr.gov/current/title-12/chapter-VII/subchapter-A/part-702/subpart-A/section-702.106
2) https://ncua.gov/regulation-supervision/regulatory-compliance-resources/net-worth-ratio-plan-and-prompt-corrective-action-resources/prompt-corrective-action-faqs
Mr. R is making the rest up... this seems to be habitual.
Guess trolls don't blush...
So are you denying you had to come up with a capital restoration plan when you dropped below 7%? Answer carefully, you’re under blog oath and all the old exams are on a drive.
Delete12:10 am Yes, a capital restoration plan was not required by the law; you're up late why didn't you read it?
DeleteThe requirement on how to return to 7% is prescribed, the same for every credit union - no plan is required.
Capital could go to new projects for the combined credit union that benefits all members.
ReplyDelete6:04pm Troll Think!
DeleteAdmirable excuse, but this comment is a good example of how people misunderstand capital in credit unions - members, boards, ELT.
Needing capital to do "new projects" is not how capital works, not what it is for.
Very common misunderstanding, especially among mirror gazing trolls!.
9:16… just false. Capital can be used in many ways, including investments in products, channels, technology, people, etc. These investments, all else equal, reduce net income. Lower net income reduces the rate at which capital is built - in the same way dividend expense does when we give back capital to members through higher deposit rates.
DeleteNot a common misunderstanding at all. Capital usage and deployment can and should take many turns, but just to CD and mm account holders.
9:32am Trolltwit Alert! Blah, blah, blah... here we go again! Not how capital works in the non-troll reality world.
DeleteThat first paragraph on "capital use" is a classic example of a mis-logic form called a "syllogistic fallacy". Now don't get worked up over the fancy phrase, "trolltwit" works just as well.
Here's an example of this type trolltwit mis-
logic: "All cows eat grass, grass is green, therefore cows are green."
"All credit unions have capital, capital is very "green", therefore you can't have it."
This is a public declaration of the problem with capital ignorance in credit unions - thank you!
Hard to find $ to invest in tech and people, too when you manage to that low of a ratio. You act like there is a free lunch and just giving capital to members with below market rate loans rates and high deposit rates comes with no consequence.
Delete10:29am Trolltwit Doubledown Alert! The capital level of a credit union does not determine tech nor people decisions... our troll evidently believes that cows really are green! (see 10:06am above)
Delete"Just giving capital to members with below market rates and higher deposit rates" ....
GOOD LORD, ISN'T THAT WHAT A MEMBER-OWNED SECU IS SUPPOSED TO DO?
The capital level doesn’t determine tech or people decisions you moron. That’s not what was said. You clearly have a warped concept of capital strategy and don’t seem to grasp the simple concept that capital can deployed for something other than rates.
Delete12:10pm Help cure the warp! Exactly how does one "deploy" capital? Where do you keep it before it is "deployed"?
Delete12:10pm A CU’s capital is the cumulative sum of its retained earnings over time, It sits in the balance sheet as a liability. Tracking so far?
Delete2:41pm Was pretty sure you didn't know the difference in a credit union... been ovious for a while.
DeleteHere's the legal definition:
§ 54-109.53.
(a) The capital of a credit union consists of the payments made by members on shares, undivided surplus, and reserves.
Again, Is SECU better off following troll think or North Carolina law?
2:45pm Oh, and BTW, our deposits are insured by the NCUA, not the state, and they use different language on what capital is and isn't. You might want to educate yourself.
Delete9:53pm Over the years have tried to educate myself. Want to guess which definition of capital SECU is legally required to follow?
DeleteWill give you three guesses, so you won't get it wrong!