NCUA News Release

NCUA Chairman Urges Credit Unions To Manage Risks In Today’s Growing Economy

Amelia Island, FL, May 20, 2005 – As the nation’s economy charts a robust course in creating more jobs and increasing productivity, National Credit Union Administration (NCUA) Board Chairman JoAnn Johnson told credit union executives they must be prepared to closely manage the risk as it relates to the rise in interest rates, among others indicators.

Addressing the Southeast Corporate Conference and Annual Meeting, Chairman Johnson said that credit unions are positioned for sustained safety and soundness; however, challenges will require credit unions to monitor risks in consideration of the country’s economic condition.

“With nearly 3.5 million jobs created since May 2003, home sales climbing to an all time high, productivity at a 9-month high, and manufacturing on the rise, credit unions will continue to play a vital role in ensuring continued growth, while also balancing the risks associated with the institutions’ diverse portfolios,” said Chairman Johnson.

Economic conditions are an integral part in determining the environment in which credit unions operate. It is especially important currently when the direction of the economy is still growing. Chairman Johnson said the agency’s capital markets and examination and insurance teams continuously watch and analyze economic developments to ensure that the agency is enabling credit unions to take advantage of presented opportunities, yet to do so in a safe and effective manner.

NCUA has identified four economic fundamentals, which the agency’s says are of the most importance to credit unions at this point in time. They are interest rates, inflation, consumer spending, and employment. Among them, interest rates and inflation are of the special concern to credit unions, as well as to the overall economy.

• Increasing Interest Rates can negatively impact credit unions’ interest margins, liquidity, and credit quality of their members, potentially creating an earning squeeze. They could also negatively impact mortgage demand, changing a composition of credit unions’ loan portfolios. With both short- and long-term interest rates expected to increase this year, NCUA examiners are paying special attention to the position of credit union balance sheets;

• Inflation is on the rise. A potential increase in inflation could also lead to more of an increase in interest rates, exacerbating the above impacts;

• Consumer Spending is another indicator NCUA is watching. It represents 70% of economic activity, and as such is very important; and

• Employment Growth has been improving and will be very important going forward as the economy will need jobs and income growth to support consumer spending. It also has a major impact on confidence and households’ ability to borrow and service their debt.
  

Because economic conditions differ between states and regions, NCUA not only analyzes the overall macroeconomic conditions, but also carefully analyzes regional and state economic developments to gain a better understanding of credit unions’ performance in those states and regions.

“We also provide our examiners with knowledge on current economic conditions in their regions, to enable them to make more informed decisions and discuss with credit union managers the potential impacts of the changing conditions,” said Chairman Johnson. “We constantly analyze the implications of economic, as well as other developments, to determine potential impacts on credit unions’ operations, loan and membership growth, and decision making ability. Our role as a regulator is to help ensure a safe and sound operating environment exists for credit unions to compete and prosper.”