Concentration Limits
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 |
