"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?
