At a recent reunion, a colleague told a story of his granddaughter’s college interview. The panel was composed of professors and tutors from the college. Her area of study was liberal arts, not science.

She paused for a time, then said: “I don’t know the answer. But here is how I would test to determine what might be the situation.”

She was admitted to the college.

Many personal decisions and business options do not have factually provable answers, such as 1 + 1 = 2.  Experts, analysis, prior examples, and other learning can suggest possible options. But ultimately, many outcomes are unknowable and require reflective judgment.

A credit union example

Last week, a credit union professional asked, “Do credit unions have too much capital?” He provided no background, just the question.

I asked several credit union leaders how they would respond. Their universal answer: “It depends.” They said each credit union’s circumstances are different—the member base, the area’s economy, and multiple other factors…This is something each credit union must determine for itself.

This may be procedurally correct. However, is there a conflict as the persons making the decision benefit most from overcapitalization? One former CEO of a large credit union publicly stated that a net worth ratio over 7% is “stealing from the members.”

Higher net worth takes some of the performance pressures off management and boards. Unlike public companies, there are no market comparisons forcing them to meet a minimum level of return on equity, or ROE. This is the primary measure of effective capital management.

Is a more objective standard required? The distribution of capital ratios suggests the question of overcapitalization is widespread.

The capital distribution of credit unions today

This is the distribution of net worth ratios for all credit unions at year-end 2025. The NCUA’s rule states that 7% equity ratio is considered well-capitalized.

At the highest ratio level, 45% of credit unions hold 17% of assets, or almost double the well-capitalized rule. A number of these are smaller credit unions, but there is at least one top ten credit union in this tier.

Most credit unions report annual increases in net worth, no matter the level, as a success indicator. The common expectation as to how much capital is enough is one word: more.

Because leaders may not know a precise answer, this does not excuse the need for objective processes and relevant comparisons for setting a maximum level and for returning excess net income to members. Effective capital management begins with ROE. Public markets generally expect outcomes in the 10-12% range as the minimum standard.

Answering questions of judgment

The “too much capital” question can be answered by every credit union. The analysis should be transparent for members. It is an example of management’s accountability to members of their stewardship of the collective savings.

Public presentation of a capital cap is a sign of thoughtful management. “More” is not a capital plan. Nor is an ever-increasing net worth ratio a success.

A cap may even be more important in an era of market exuberance with bank buys, FinTech investing, and crypto partnerships announced almost daily. A capital maximum could bring some much-needed discipline in situations where overcapitalization seems to be “burning a hole in management’s pockets.”