MBL Limits-Be Watchful of What Others Wish For
Credit union industry leaders promote false pride when stating that the nation's credit unions did not cause the current economic crisis in America. With less than 5% of the financial market, credit unions could not possibly cause the current macroeconomic challenges, but it is not for lack of trying. Industry leaders did a dandy job creating our own industry crisis.
The corporate credit union debacle is very much an industry-bred blunder that started with the corporate credit unions asking for expanded investment authority. CUNA, NAFCU and NASCUS, without understanding downside risk, rallied behind the expanded investment request. NCUA, wanting to be industry-friendly instead of a prudent watchdog regulator, championed the corporate credit union investment authority. Today, no one wants to be held accountable for the billions of dollars lost as a result of the mismanaged corporate credit union expanded investment authority.
Reminiscent of the expanded corporate investment authority, we now have much of the same industry leadership pushing for expanded member business lending. Doubling MBL limits for natural person credit unions is not something a majority of credit unions want or need. Yet, if a minority of powerful credit unions and industry trade associations get their way, which they usually do, MBL could easily be the next industry crisis.
If you think I'm concerned over nothing, take a look at a few 5300 call reports. For much of the last 10 years, many folks within the industry considered one particular California credit union to be a leader in MBL. The CU had negative net income of $23 million in the last two years and has only maintained a capital ratio above 7% by shrinking assets from $620 million to $480 million since 2008.
The proposed MBL limit increase to 25% of assets lacks safeguards for the thousands of credit unions that pay into NCUSIF and do not do business lending. Again, looking at the credit union mentioned above, it still has more than $80 million in borrowed (nonmember) funds, which underscores the risk of tying MBL limits to total assets. In addition to the 25% limit, MBL proponents want MBL exemptions increased to $250,000. Higher exemptions open the door to a much higher, but under the radar, MBL risk exposure to NCUSIF.
A more financially responsible MBL limitation tool is already part of current MBL regulation: 1.75 times the credit union's net worth. Deleting the total asset portion of the regulation is all that is necessary. Then, the net worth factor will achieve expanded MBL lending limits for well-capitalized credit unions. And, it keeps credit unions with lower capital levels in-check. It is a prudent solution for all of us that fund NCUSIF. ?While some credit unions do a solid job in MBL, the industry as a whole, including regulators, is ill-prepared for asset-based expanded limits. We should not risk another potential NCUSIF bailout until we're done paying for the current short-sighted expanded authority debacle. This is something to think about as we budget for a 20 basis point (or more?) NCUSIF assessment this year.