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Capital is the lifeblood of a credit union, providing a cushion for anticipated and unidentified losses, a base for future growth and a means to meet competitive pressures as they arise. As a general rule, the greater the uncertainty a credit union faces, the more capital it should maintain. A strong capital position provides a credit union additional flexibility to manage risk and respond to future uncertainties such as asset losses, sponsor layoffs and adverse economic cycles.

The most basic test of a credit union's capitalization is the net worth ratio, which measures an institution's retained earnings as a percentage of its total assets. As the COVID-19 pandemic arrived, credit unions found themselves very well capitalized. At 11.38%, the nation's 5,349 credit unions ended 2019 with one of the industry's highest average net worth ratios ever recorded, having added more than 150 bps to the ratio since the 2009 trough (9.87%).

The challenges in response to the coronavirus episode, however, are likely to be as difficult as credit unions have confronted. And, as they navigate unprecedented effects on provisions for loan and lease losses in the short-to-medium term, credit unions would be wise to examine the ongoing pressures that are likely to be brought on their capital stock. The balance of this article highlights three specific headwinds to capital that credit unions are likely to confront in the months and years ahead.