CHICAGO — The NCUA won't allow the NCUSIF's equity ratio to fall below 1.2% for long because doing so would be “irresponsible,” NCUA Chairman Debbie Matz said at a luncheon address at NAFCU's Annual Conference.

She also told attendees that it is “not practical to try to manage the ratio to just a few basis points above the statutory minimum of 1.0%.”

Matz said if current trends in credit union losses continue, the fund's equity ratio-currently 1.22%-is likely to fall below 1.2% by the fall. In response to some of these financial problems, CUNA and NAFCU had asked the agency to consider letting the fund drop below 1.2% to minimize the assessment that would be levied on credit unions but Matz said the board would consider keeping the ratio a few basis points below 1.2% “for a limited time.”

The NCUA Board is scheduled to vote on the amount of the assessment for 2010 at its Sept. 16 meeting. This will be in addition to the 13.4 basis points of insured shares assessment that the agency announced earlier to pay back this year's portion of the loan from the Treasury Department to finance the Temporary Corporate Credit Union Stabilization Fund.

Matz declined to say what the assessment would be but laid the groundwork for doing so by noting that in 2009 there was a charge of $124 million to the NCUSIF because of credit union failures while so far the fund's provision for loan losses for this year is $1.1 billion.

She said that to reduce the magnitude of future losses-and future assessments-her agency had increased the frequency of examinations and made the process more rigorous. But she also said that credit unions could take steps to minimize the size of future assessments by “managing risks effectively and by restraining costs reasonably.”

She added that the agency hopes its red flag reviews will prove helpful in making key decisions and minimizing losses.

“But, bear in mind, the amount of assessments depends not only on your business decisions, but on the collective business decisions of your colleagues at other credit unions. This is the very nature of a cooperative system,” she noted.

“Your members, along with your fellow credit unions, are counting on you to do your part to operate safely-and to prevent further losses and higher assessments, she concluded.

NCUA Board members Gigi Hyland and Michael Fryzel talked about how credit unions can work hard and smart and emerge from their current financial difficulties.

Hyland said declining net worth ratios and increases in member business loan losses are among the trends causing the agency great concern. She also said the costs of dealing with corporate credit unions' legacy assets will pose more challenges to the industry's financial health.

She said the average net worth ratio on recent call reports was 9.8%, a notable decline from their recent high mark of 11.6% in 2006, before the financial crisis.

Hyland also noted that the agency was stepping up its examination schedule and was keeping a close eye on practices that posed strong risks to individual credit unions and the system, such as interest rate risk and concentration risk.

Credit unions should respond to the current climate by reaching out to everyone in their field of membership, educating their members on personal finance and making responsible member-business and small-dollar loans. She said credit union boards and staffs should reflect the diversity of their members.

Fryzel said although he sees a light at the end of the proverbial tunnel, “that light is flickering.”

He added that credit unions resemble his native city of Chicago because “they have broad shoulders and a we will attitude.”

He praised NAFCU for its vigorous advocacy efforts and for recognizing that “the regulator can't always take the popular position.”

–cmarx@cutimes.com

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Matz Puts Limits on Lower Fund Ratio; Hyland and Fryzel Offer Stark Advice

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