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Concentration Limits

June 10, 2011

When setting concentration limits, one path credit unions have gone down is to set limits as a percent of portfolio (loans or investments).  Consider the following example when setting a limit like that.

Credit Union A and Credit Union B are both $500M in assets and have 8% net worth.  Credit Union A has a 60% loan-to-asset ratio while Credit Union B has an 80% loan-to-asset ratio.

What happens if both credit unions limit fixed-rate first mortgages to 25% of loans?

Credit Union A is permitted to have $75M in fixed mortgages, which equates to about 188% of their net worth.

Credit Union B, however, is permitted to have $100M, or 250% of their net worth, in fixed mortgages.

Is setting limits as a percent of total loans or total investments really going to protect your credit union?

CU A CU B
Assets $500,000 $500,000
Net Worth $ $40,000 $40,000
Net Worth % 8% 8%
Loan $ $300,000 $400,000
Loan/Asset % 60% 80%
Portfolio Limit (% Loans) 25% 25%
Portfolio Limit ($ Loans) $75,000 $100,000
Allowable Limit as % NW 188% 250%
$ in 000’s

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