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What is Capital and Why is it Important?

Posted by Stacey Klein on 4/22/2020

Robix-Capital

You may have seen some of the recent e-mails we’ve sent to let you know that, despite these uncertain times, your money is safe with Logix Federal Credit Union.

You might have even noticed some similar language in each one: Your deposits are federally insured up to $250,000 by the National Credit Union Administration; we’re one of the healthiest and strongest financial institutions in the nation with 15% capital. Then we tell you that these statements ought to put our members’ minds at ease.

But, do we ever really take the time to explain what the heck it means to have such high capital, or why that should put you at ease?

Nope. We sure don’t.

We’re going to take five minutes now to explain why these things matter and why being a member of Logix is, indeed, smarter banking.

Capital Idea

Let’s start with the obvious: Logix is a credit union, not a bank. The biggest difference is one you probably already know: Credit unions are owned by their members. Another difference is how credit unions and banks measure their capital.

Another way to think about capital (a.k.a. net worth) is the assets and resources available to us - it's what allows us to absorb credit losses and adverse economic circumstances. It’s what we have socked away for a rainy day or in case of a downturn, like we’re in now. This means that we have plenty of money saved to keep the lights on, just in case we stop earning enough income to cover our expenses.

Net worth matters because it is one of the factors regulators use to determine the “soundness” of a financial institution. To be considered “well-capitalized” a credit union needs to have capitalization of at least 7%; for banks it’s around 8%.

(Warning! Math ahead…) If you take all of our assets and subtract our liabilities, you get net worth. We take that net worth number and divide it by our total assets to show what the ratio of net worth is, compared to assets. For Logix, this number is 15%. For sake of comparison, the net worth of the whole credit union system is about 11.37%. When we tell you we’ve been given a 5-star rating by Bauer Financial, our high net worth is one of the reasons why.

Essentially, having a larger net worth means we have a larger safety net than most. As you can see by the numbers above, our net worth is more than double the minimum required to be considered sound. We have more flexibility to take losses, continue lending, and weather situations like this, where our income may be challenged.  We have a large savings account to tap into that will last for many generations to come. 

Be Insured, Rest Assured

How does having a high net worth and capital ratio benefit our members? Our higher-than-average capital ratio means we'll remain solvent while other financial institutions with less capital could face challenges.

Our member deposits are protected by the NCUA’s National Credit Union Share Insurance Fund, with deposits insured up to at least $250,000 per individual depositor. This can get a little sticky: The term “individual depositor” refers to the legal ownership of an account. So, if you and your spouse were the legal owners of a joint account, but you and your sibling were legal owners of a different joint account, those accounts would be insured separately. However, if you and your spouse were the legal owners of multiple accounts, they would all be grouped together under one legal ownership. (Fun fact: IRAs are separately insured up to $250,000.) Calculate your insured funds here. Credit union members have never lost a penny of insured savings at a federally insured credit union.

As a member-owned cooperative, each and every one of our members has the same ownership status – the $5 "par value" deposit in your main savings account – so there is no difference in how protected you are, regardless of whether you’ve got a little or a lot in your other Logix accounts.

While the NCUA provides a basic level of deposit/share insurance coverage, it’s our high capital that means we will have the money to continue to run our business and keep your deposits safe -- even if our operating income were to be challenged as a result of an economic downturn. This is a bigger safety net compared to other credit unions or banks with less capital.

As dim as the nightly news can be, we’re hopeful to see the economy begin to recover quickly in the months ahead. In the meantime, we’ll continue to work as hard as we can to maintain your trust and financial well-being even in these difficult times.

Topics: Insider

Meet the blogger

Stacey Klein

Stacey Klein

Stacey has a bachelor’s degree in journalism from CSUN, and a master’s in journalism from Northwestern University. One winter in Chicago was enough to bring her back home to sunny Los Angeles, where she’s spent the last 20 years working in the Santa Clarita Valley. When she’s not chasing around her toddler, she loves spending time with her husband fixing up their fixer-upper.

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