As the countdown to the October deadline for hitting key minimumfinancial ratios draws nearer, more spreadsheets are floatingaround the credit union industry and always there are the samequestions: How many corporates will fold up shop before thedeadline because they cannot hit the targets? Are the ratios infact fair measures of corporate credit union performance? And,lastly, perhaps most worrisome is this question: Are the ratioscompelling corporates to abandon much of the work good corporatesonce did?

Big questions all, and all questions that strike at the centerof what the NCUA is doing in its attempt to better manage riskthroughout the corporate credit union system. “The new standardswill bring our regulation more in line with how banks areregulated,” said Jay Murray, CEO of Mid-Atlantic CorporateFCU.

David Savoie, CEO of LouisianaCorporate Credit Union, added: “Wherever there is risk-basedcapital, you need ratios. But,” he pointedly added, “NCUA is stilltrying to wrap its arms around all of this.”

Savoie offered the hypothetical of asking three NCUA examinersfor input on assessing the risks involved in a particular activity,and, he suggested, “You would get three very different assessments.NCUA is still working on standardizing this.”

And that raises an enormous problem: “Risk assessments ofdifferent credit unions will not always be apples to apples,” saidSavoie. “Often it will be apples to oranges.” One examination maybe optimistic, another pessimistic, and dramatically differentratios will result–with all that means for the futures of affectedcorporates.

Is that fair? Savoie shrugged because, ultimately, this is whatit is in the early days of the NCUA trying to safeguard the creditunion system against a repeat of the enormous risks–and devastatinglosses–that almost undid it. There are dead ends and unexpectedU-turns but smoother transit cannot be expected just yet. “We needmore agreement within NCUA about weighting risks but we do not havethat now,” said Savoie.

And then the stakes turn even more serious: “Some corporates arenot going to make the numbers,” predicted Evan Clark, CEO of theDepartment of Commerce FCU.

Corporates face two make-or-break ratios this October: totalcapital and net economic value. Both are believed to be barometersof corporate credit union health, but not all the time and not byall people.

A glance at year-end numbers for corporates in fact shows 15falling short of the NCUA mandated 4% minimum to take effect inOctober. Some of those (VACORP, for instance) already haveannounced an intention to merge. Others are close enough to the 4%target that a big push ought to get them there. The bridges, too,may be reconfigured and for that reason their very low currentnumbers have no meaning for the future. But there nonetheless are ahalf-dozen or so corporate credit unions with clouded futures,suggested Clark. “Many will have real troubles with the totalcapital ratio.”

Tactics are being deployed to get their other key ratio, NEV, inline, but is this what best serves the credit union system? “Theinvestment portfolios are plain vanilla,” said Clark. “They areinvesting very short term, so there is very little risk, and thishelps their NEV,” which equals the fair value of assets minus thefair value of liabilities. At year-end, 11 corporates fell short ofthe 2% minimum NEV mandated by NCUA for October, but many of thoseappeared to be within reach of the mandate.

But that may not be the good news it seems. “I have a problemwith NCUA putting so much emphasis on NEV,” said Clark. “NCUA hasput the clamps on what corporates invest in so their NEV will begood.” Set out to minimize risk, suggested Clark, and NEVnecessarily tilts high. But almost by definition, a soundinvestment strategy incorporates risk. So Clark suggested thatsome, perhaps many, corporates are abdicating the investment partof their mission.

Not everybody agrees. Chris Felton, seniorvice president for member relations at Corporate Central (whichboasts extremely high numbers for both total capital and NEV),said: “NEV is a critical number. It takes into account the risk ofthe portfolio.” At Corporate Central, infact, the current NEV is 11.25% and, elaborated Felton, nearly halfthe portfolio is in cash. “Our NEV is a reflection of ourconservative nature,” said Felton.

That is exactly what the NCUA seems to want from corporates. Butare the corporates that are likely to be left standing in fact whatthe credit union movement needs? Henry Wirz, CEO of SAFE CreditUnion, is blunt. “We are blowing it. We are showing up for a gameof bowling and NCUA is handing out rule sheets for bowling. We aregoing down the wrong path and it starts with the NCUA rules.”

“The credit unions that come out of the rebirth of the corporatesystem will be less sophisticated pass-through corporates. The moresophisticated corporates are the most badly wounded. The systemwill be rebuilt on the corporates with the least experience,” saidWirz.

Mid-Atlantic's Murray, for his part, admitted this: “We will notsee a new Tier 1 corporate soon. Balance sheets going forward willbe smaller. In 10 years, perhaps we will see a return of Tier 1sbut not likely sooner.”

One upshot: “The changes are pushing natural person creditunions to invest outside the corporate system,” said Murray. “Willthere be proper oversight? That is not yet clear.”