Reading NCUA Letter 09-CU-06 was difficult.  However, since our founding in 1991, we have encouraged our clients to always consider Event Risk Conditions.  Most would agree that we are in such conditions!  Since the publication of NCUA Letter 09-CU-02 in January, we have encouraged our clients to consider the likelihood of additional assessments.  Following 09-CU-06, we continue that encouragement.

In light of 09-CU-06, here are some questions NPCUs should consider asking about Corporate Stabilization:

• What would the cost to NPCUs be if additional corporates are put into conservatorship?
• What would be the cost if a greater number of NPCUs fail over the next couple of years?
• What would be the cost of recapitalizing the corporate system?

We hope a couple of these questions can be answered during NCUA’s Webcast Monday, March 23.  While these are ominous questions, facing them head-on will help NPCUs to be much better prepared.

The following are questions we feel NPCUs should be asking related to their long-term strategic and financial objectives:

• What are our longer-term liquidity options should existing options become limited? (Note: the FHLBs are experiencing financial difficulties)
• Are our strategic initiatives still applicable, or do they need to be altered or postponed given the most recent assessment?  …If member capital needs to be written off?  …If there are additional assessments in 2009/2010?
• Would we be willing to contribute financially to a corporate recapitalization effort? If so, how much?
• How much additional member deposit growth could we absorb while continuing to maintain sufficient net worth?
• What if we have unexpected losses from our own business model?  How would we react?

A few words of caution.  It is understandable to want to find ways to improve upon a dismal earnings forecast for 2009.  However, while understandable, it may add unacceptable risks to your financial structure.  We strongly urge all NPCUs not to make decisions based on only the short term.  For example, the 10-year Treasury Bill and 30-year mortgages are now at, or near, record lows; increasing yield with longer-term investments or by making more mortgage loans and holding them in portfolio can add interest rate risk.

We encourage NPCUs to test the financial consequences, in advance, of all proposed changes to their financial structure, especially increases in long-term fixed assets.  Additionally, reducing operating expenses judiciously is one thing, but slashing them outright can threaten core drivers of profitability once markets stabilize.  A core purpose of net worth, after all, is to sustain a credit union through Event Risk Conditions and other rough times.

We have been asking numerous credit unions the following:

Assume corporates are stabilized but need to be completely recapitalized.  If the system were restructured and you felt it safe, how much would you be willing to spend as a percent of assets to recapitalize?  The most common answers are ” zero” and “we have not considered it.”

If this is the sentiment of the majority then it would greatly restrict the options for restructuring.

Since launching c. myblog on Tuesday, we’ve received numerous emails and phone calls from credit unions expressing a wide range of ideas about the future role of corporate credit unions.  We thought we would summarize a few of them and ask those of you viewing c. myblog to vote on them – anonymously.  Of course, we encourage you to add your thoughts as well.

The ideas are listed below and will show up as comments to this post.  Please vote on each one using the star system shown below each comment by clicking on the number of stars you wish to assign each idea.  A vote of one star means you completely disagree with the idea.  A vote of five stars means you completely agree with the idea.

• Payment systems (ACH, draft processing, settlement, etc.)
• Liquidity and liquidity management?
• Investment services, such as term certificates and broker/dealer services?
• Coin and currency services?