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Federal regulator’s action on corporate CUs will affect credit unions through 2021

The National Credit Union Administration (NCUA), credit unions’ federal regulatory agency, took action Sept. 24 on several issues affecting the corporate credit union system. Corporate credit unions are “wholesale” credit unions that provide “back office” financial and administrative services to “retail” credit unions – those that provide services to the consumers who are their members. The NCUA’s actions stand to affect Wisconsin credit unions – and all other federally insured credit unions nationwide – until at least 2021. NCUA’s actions included:

Conserving three additional corporate credit unions. The NCUA took control of Southwest Corporate FCU, Members United FCU and Constitution Corporate FCU, bringing to five the total number of corporates under agency control. (WesCorp FCU and U.S. Central FCU were conserved last March.) All five conserved corporates were determined to be unstable because of their over-investments in mortgage-backed securities that significantly devalued during the turmoil in the overall mortgage market. The conservatorships will ensure that services to retail credit unions that use those corporates remain unaffected and that service to members of retail credit unions continues with no disruption.
Adopting a rule intended to reshape the corporate system. Since early 2009 NCUA has used input from credit unions nationwide, the US Treasury, Federal Reserve and CUNA’s Corporate CU Task Force, to determine reforms for the corporate system that would help prevent future instability among corporates. This new operating framework will require higher capital levels at corporates and place greater controls on their risk-taking, while strengthening oversight, governance and transparency. For example, the new rules prohibit a corporate CU from accepting funds from a single source exceeding 10% of its assets and from concentrating too much risk in a single type of asset.

Approving a plan to handle the conserved corporates’ finances. NCUA also approved a method to handle and finally dispose of the mortgage-backed security assets still held by the conserved corporates. The agency will package about $50 billion of these so-called “legacy” assets and sell them on the open market. As these securities mature through 2021, the NCUA will guarantee the buyers against any credit loss – which will be much less than the market losses that would be incurred if those assets were sold today. Nevertheless, future losses on legacy assets are expected to range from $8.3 to $10.5 billion, which will be covered by assessments paid by all federally insured credit unions nationwide through the temporary Corporate Stabilization Fund. The Fund was set up by the NCUA in early 2009 to collect assessments from all federally insured credit unions. These assessments are then used, in turn, to repay borrowings from the Treasury made necessary by the losses of the conserved corporates.

Already, all federally insured credit unions nationwide – including all credit unions in Wisconsin – have paid a total of $1.3 billion for Corporate Stabilization through two assessments by the NCUA last year and this year. Credit unions have until 2021 to pay the remainder of the corporate losses through payment of their annual assessments. NCUA will advise credit unions at its November 2010 board meeting the dollar amount it projects as the corporate assessment for 2011. Currently, the annual average Stabilization assessment is estimated at 6.9 basis points to 7.7 basis points, or between 6 to 8 cents for every $100 of insured deposits.

Also in November, the agency will project an estimated premium credit unions must pay to keep the credit union system’s Share Insurance Fund operating at a safe level. This cost is apart from the corporate expense and is determined by losses experienced by retail credit unions nationwide. Credit unions will pay premiums annually, as necessary, to cover this cost. The premium amount for 2010 was 12.42 basis points, or just over 12 cents for every $100 of insured deposits. In future years, this cost will continue to be based on amount of actual losses incurred by retail credit unions. So the better credit unions do, the less they will have to pay in premiums.

NCUA Chair Debbie Matz has applauded credit unions in recent news coverage for handling these costs on their own, without any expense to taxpayers. CUNA President & CEO Bill Cheney has underscored that point as part of media interviews and a video that stresses credit unions have not received a “bailout.”

The League has posted materials in its Corporate Stabilization webpage to help credit unions understand, calculate and plan for future Corporate Stabilization assessments as well as Share Insurance premiums. The site also includes a summary of the NCUA’s actions as well as talking points to help credit unions explain them to board members, members and media.

League consultant Bill Rockeman also continues to work with Wisconsin credit unions that have questions or need assistance with calculations or presentations on these issues. Contact him at (800) 242-0833, Ext. 6024.