I am not saying that credit unions should shoot for 7.01% capital to stay just out of the reach of prompt corrective action, but the current 11% level across the industry might be too high, especially these days. Why not 8 or 9% capital? Put the money to work. Boards need to remember that good management and sound policies are in fact the first defenses against losses, not a war chest of capital. Of course, if credit unions ever get the prized risk-based capital system, they will be a lot better off. Hopefully the work of corporate credit unions and the Association of Corporate Credit Unions will pay off and corporates will soon be operating under a risk-based system. Once corporates prove they can excel under such a system, it will be difficult for Congress not to extend risk-based capital to natural person credit unions. (By the way, the Association of Corporate CUs is one group that is making things happen these days. Mike Canning and his crew are taking on the big issues–compliance and capital.)

The delinquency ratio is another sore point for me. The ratio has declined from 0.73% in December 2005 to 0.59% in March of 2006 and 0.58% as of June 2006. How much lower can it get? It certainly doesn't look like credit unions are pushing the envelope on credit quality and reaching out to B, C and D paper. The A paper loans are easy, but the so-called underserved market is in the C and D range and they need credit unions. Risk is a dirty word for many boards, but they need to get their risk tolerance up and work with the members who need it most. Sure, the risk is greater, but with the industry's 0.58% delinquency ratio, boards already have a built-in buffer zone. By comparison, bankers delinquency ratio hovers at 1.5%.

Here's another belief I wish more credit unions would move away from–all members should get the same deal. Sounds great in theory, but why should the A paper member who brings very little risk to the table get the same rate as the D paper member? Risk-based lending isn't bad! It's a way to give weak credit members an opportunity to get loans and for the best credit members to be rewarded for their financial savvy.

Returning to numbers, examiners also need to lighten up. If a CU drops a half of percent in capital from one quarter to the next, the examiner will be all over them. But if that CU has 12% capital, should they be? Hopefully examiner pressure isn't forcing credit unions to stay in their 1% ROA, 10% capital, and below 1% delinquency mentality. If that's the case, NCUA needs to re-educate examiners to be more in line with the realities of 2006 economics.

And to the bankers out there whose industry posted record profits yet again (see story page 3), you cannot look at the current credit union capital structure with a straight face and say that credit unions have advantages over banks. Forget the taxation issue, I'd like to see banks try to grow when their only means of raising capital is retained earnings, their minimum capital requirements are 2% higher than what they have now, and they do not have a risk-based capital system–that's the capital world credit unions live in, and it's one bankers want to steer clear of. –Comments? E-mail [email protected]