Big credit unions may soon join megabanks in undergoing annual examinations of their ability to survive a downturn, a step that could force financial cooperatives to raise fees or pay less in interest to their members.
On Wednesday, the National Credit Union Administration said it is drafting a rule to subject credit unions with more than $10 billion in assets to stress tests, which would determine whether the institutions have adequate capital to withstand economic shocks.
The regulatory agency said the “shocks” used in the stress testing would be based on scenarios developed by the Federal Reserve. The Fed typically uses two dozen variables, including unemployment, incomes and exchange rates, in hypothetical scenarios designed to assess the strength and resilience of mammoth banks and other financial institutions.
Whereas the Dodd-Frank financial reform law required the Fed to administer annual checkups for megabanks, it made no provision for large credit unions. Granted, the largest credit union — Navy Federal Credit Union, with $54 billion in assets — is easily dwarfed by the largest bank, JPMorgan Chase, which has $2.4 trillion in assets. And credit unions did not engage in the kinds of risky trading that nearly toppled the financial system a few years ago.
Yet if any of the four largest credit unions were to fall, it could pose a tremendous threat to the insurance fund. Deposits at federally insured credit unions are protected by a $11.5 billion fund, made up of contributions from credit unions, according to the NCUA.
“Stress testing is just the prudent thing to do,” said Debbie Matz, chairman of the NCUA. “We need to utilize all the tools at our disposal to look ahead in order to protect the industry in the future.”
The regulatory agency has yet to flesh out all the details of the proposal, which it plans to release in the next month or two. Once the proposal is released, the agency will accept comments for up to 60 days.
“It’s a wonderful idea, if it is done in an open and transparent manner,” said Jim Blaine, president of the State Employees’ Credit Union, which has $26 billion in assets. “We believe the stress test parameters and results should be published to the public. Far more openness in the financial system is needed to avoid problems of the past.”
Matz said the agency is still determining whether to make the results of the stress tests publicly available. She agreed that public disclosure would enhance transparency but said results could be misinterpreted and lead people to draw inaccurate conclusions about a credit union’s stability.
Credit unions generally emerged from the financial crisis with minimal scraps. There were a few dozen failures. The largest occurred at corporate credit unions, which are specialized institutions that provide products and services to the entire credit-union system.
Compared with banks, credit unions set aside more money in reserves to cushion against losses. Unlike banks, credit unions cannot tap the public markets to raise money. Their capital comes from retained earnings.
If a credit union were required to raise more capital after failing a stress test, it could increase account fees, reduce lending or pay less interest on accounts to improve its position.
All of the four big credit unions said they will reserve judgment until the proposal is issued. All of them conduct internal stress tests and are considered well capitalized by regulators.
B. Dan Berger, chief executive of the National Association of Federal Credit Unions, said, “The agency’s proposed rule on stress tests seems to be an additional, unnecessary burden for credit unions. Moreover, we continue to object to any regulation without clear justification.”