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Comments on NCUA Concentration Limits Supervisory Letter

June 10, 2010

We have received many calls on the NCUA Concentration Limits Supervisory Letter.  Credit unions are asking us what limits will satisfy NCUA or if there are any standard limits.

The answer is:  there is no standard answer.  This was stated by NCUA in conversation along with NCUA’s statement, there is no magic formula, during a webinar hosted by NAFCU on June 2, 2010.

Before establishing concentration limits for policy, we think there are several key questions that need to be considered.  Following are just a few:

  • What types of concentration limits are appropriate for our credit union?
  • Should we focus on classes or concentrations within classes?  If concentrations within classes, how much should we drill down?
  • How will the newly established limits impact our strategic plans, business decisions, earnings and competitive stance?  Test drive potential scenarios and business decisions your credit union may want to make to see the potential downside of proposed limits.  Keep in mind that the supervisory letter is not limiting the discussion to assets.
  • What is our rationale for determining concentration limits?  If we are experiencing unacceptable losses with our current concentrations, will we set concentration limits lower than our current levels?
  • How will we respond if we reach a designated limit?  Will we shut down our program?  Will we sell existing holdings to make room for new business?
  • Will these new limits prevent our credit union from taking too much risk, or will they result in unintended consequences of taking more risk?  For example, if you reach your limit on typical products, will you begin adding products where there is limited expertise in order to increase earnings?
  • Do absolute levels of concentration cause too much risk?  Or, is it the rate of growth in a particular concentration?  Or, is it the rate of growth in concentration during an economic boom?
  • How will we aggregate multiple limits to ensure we are not missing the big picture?

Because this decision will directly impact strategy, business decisions, day-to-day operations as well as competitive stance, we encourage decision makers to think through what is best for their credit union rather than take the easier route of using generic limits.

Keep in mind that that in the supervisory letter, NCUA states, “A material red flag is a credit union that simply raises the established limit when it is reached without advanced analysis supporting the rationale for the change in policy.”

If you would like help thinking through what would be best for your credit union, please contact us.

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