Your Questions Answered: How much capital is sufficient?

Joe Mecca

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Published on 02-23-2017

Categories: Member Tips, Articles

I recently received a message that was forwarded by our member services team. A member from Cary submitted an excellent question via secure message in reaction to news that the president of the Federal Reserve Bank of Minneapolis has called for a large increase in the capital requirements for large banks.

The member asked for reassurance that Coastal was well-capitalized and in a safe and secure position against future economic downturns. He enjoyed my response and thanked Coastal for being transparent and continuing to uphold his confidence in the credit union. He suggested we share the letter with the entire membership.

I loved hearing that a member followed both financial news and was up to speed on Coastal’s financials enough to ask that kind of question. If you have an interest in either, you may enjoy the following read:

 

Mr. Member,

Thank you for reaching out to us about Mr. Kashkari’s editorial.  Our member services team forwarded your concerns to me.

For starters, I don’t believe 20% capitalization is an opinion that’s widely shared among industry experts. I read up on Mr. Kashkari’s proposal, which appears to me isn’t intended to shore up the reserves of the banking industry, but rather to break up the biggest banks and mitigate the systemic risk posed by ‘too big to fail’ institutions. He’s suggesting banks larger than $250 billion be subject to a 23.5% capital requirement. This would almost certainly lead them to voluntarily split up in order to free up that cash.

Mr. Kashkari’s proposal would not put that high of a capital requirement on all institutions, and for good reason. It’s important to note that our federal regulator, NCUA, deems 6% as adequately capitalized and anything over 7% to be well capitalized. Coastal’s internal desire is to remain above 10%, and we finished 2016 at 10.19%.  Our forecast is to continue to grow that ratio over the next few years, and to be above 11% by as early as the end of 2018. As a reference, our peer group of more than 60 credit unions up to $5B in assets is also, on average, in that same target range.

Our intent is to remain between 10% and 11% for the foreseeable future. There’s a risk that comes with being motivated to become more highly capitalized, particularly in a short period of time.  Credit unions can only grow reserves through retained earnings, and a push to grow to 20% in the near term would undoubtedly have unintended negative consequences for our members, including:

  • Overly conservative lending practices that would become a barrier to otherwise creditworthy members getting mortgages, small business loans or auto loans;
  • Artificially low dividends on deposits and higher rates on loans;
  • More and higher fees, in contrast to the $600,000 in fees that we’ve eliminated this year;
  • An overall reduction in our member giveback, which helps put and keep $21 million in our members’ pockets each year; and
  • Stifled investment in new branches, product development, technology upgrades and security enhancements… all designed to meet member needs, improve your experience and protect your relationship with the credit union.

If the entire industry were to take the steps I just described above, the economy would grind to a halt. Again, his proposal isn’t to create more safety and soundness at the institutional level, it’s to remove the broader economic threat posed by the failure of extremely large banks. Smaller institutions don’t pose that threat, and 10% is more than adequate for a credit union like ours.  

However, your biggest reassurance in Coastal should come from our cooperative purpose and structural difference.  As a member-owned, not-for-profit cooperative, we have a commitment to be good stewards of our members’ money. We’re not a bank, and certainly have never been involved in the sort of profit-driven risk taking among Wall Street megabanks that led to the 2008 crisis. Our assets aren’t invested in risky funds, they’re primarily invested in our members, in the form of loans.

While we’re not immune to the widespread effects of a down economy, it should be noted that we weathered 2008 and 2009 by having more than adequate reserves (comparable to what we have now), and sensible business practices. We emerged from that economy stronger than our bank competitors and even most of our credit union peers.  We quickly returned to our pre-crisis reserve ratios, re-evaluated our lending practices and portfolio risk concentration policies to further strengthen ourselves against future downturns, and positioned the credit union for strong, sustainable growth for the next decade and more.

Lastly, as you’ve noted, your deposits at Coastal are federally insured to at least $250,000. Should something ever happen where Coastal ceased to be able to operate, the NCUA Share Insurance Fund is there to ensure you are kept whole.  We’re not, however, in any way tempted to take the sort of risks that might test that system.

I certainly appreciate your interest in the financial stability of the credit union. I hope I’ve eased your concerns, but welcome any further questions you may have.

Sincerely,

 

Joe Mecca, Company Spokesman

 

About Joe Mecca
Joe is Coastal’s AVP of Communication. In his role at the credit union, he serves as company spokesman, and is integral to the credit union’s public relations and corporate communications, so he loves to keeps members and employees in the know. A self-proclaimed personal finance nerd, Joe will gladly talk your ear off about spending plans and spreadsheets. We try to get him to turn as much of that wisdom as possible into useful blog posts that we can share with you.  


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