Coming Soon – An in-depth article on the new emergency liquidity rule.

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Compliance preparations for the National Credit Union Administration’s new emergency liquidity rule must be complete by March 31.

The liquidity rule sets up three-tiered emergency liquidity requirements for credit unions with less than $50 million in assets, between $50 million and $250 million in assets, and more than $250 million in assets.

Federally insured credit unions (FICUs) with less than $50 million in assets must maintain a basic written emergency liquidity policy but will not be required to take further action. All FICUs with assets of $50 million or more are required to develop contingency funding plans describing how their credit union will address liquidity shortfalls in emergency situations. FICUs with assets of $250 million or more would be required to have access to a backup federal liquidity source for emergency situations. Why wouldn’t credit union’s with less than $250 million in assets not want to have access to a backup federal liquidity source such as the discount window or CLF for emergency situations.

Concentration Risk

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CU officials and management have a fiduciary responsibility to identify, measure, monitor, and control concentration risk.  Concentration risk must be managed in conjunction with credit, interest rate and liquidity risks; as a negative event in any category may have significant consequences on the other areas, as well as strategic and reputation risks.

Concentration risk has increased in importance during the recent economic recession.  Poor risk management of residential and commercial mortgage loan concentrations, in particular, is having an adverse effect on credit unions nationwide; resulting in significant loan losses, earnings deterioration, capital depletion, and increased credit union failures.

The board of directors should establish a policy addressing its philosophy on concentration risk, limits commensurate with net worth levels, and the rationale as to how the limits fit into the credit union’s overall strategic plan.  Take a global perspective when developing the policy, including identifying outside forces (such as economic or housing price uncertainty) which will affect the ability to manage concentration risk.

The parameters set by the board should be specific to each portfolio and should include limits on loan types, share types, third party relationship exposure, etc.  The risk limits should correlate to the overall growth objectives, financial targets, and net worth plan.  The risk limits set forth in the concentration risk policy should be closely linked to those codified in related policies, including, but not limited to, real estate loan, member business loan, loan participation, asset/liability management (ALM), investment and liquidity policies.  Any Concentration exceeding 100 percent of net worth must be monitored carefully, and the board of directors should document an adequate rationale for undertaking that level of risk. More

Merger Accounting-SFAS 141-R

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SFAS 141 was revised in 2008 (SFAS 141-R).  The acquisition method will be required for all credit union business combinations for fiscal years (acquirer) beginning after December 15, 2008.

The fair value accounting involves determining the fair values of the:

• Equity acquired;

• Assets acquired, including intangible assets; and

• Liabilities assumed.

Conclusions 

a)    Your examiner may require a high-level of FV (and the resulting accounting impact) prior to approving a merger.

b)   Get our CPA firm involved at the onset.

This blog entry you have just read was written by Edward B. Lis, SVP CFO & Compliance. If you enjoyed this article I encourage you to learn more about Edward by visiting www.edwardlis.com.

Edward B. Lis is a well respected  credit union executive  known by his peers as being decisive; a visionary; communicative; and energetic.  He has led during difficult economic times driving change, achieving objectives, and effectively managing projects moving from a vision and strategy phase to implementation and final execution.

 Additional Resources

FDIC Accounting for Business Combinations

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