By Ron Jooss
Credit unions should let the NCUA and their trade associations know if they are in favor of their industry accessing TARP funds to stabilize the corporate credit union system or rely on internal funding to ease the burden, NCUA Executive Director Dave Marquis said during a Webcast hosted by the regulator yesterday.
When one participant suggested that credit unions stand together and absorb the loss to distinguish themselves within the financial industry during a turbulent time, Marquis responded:
“We need to understand, and the trades need to understand, what the divide is on, because we don’t fully understand that. To the extent that you can send in your pros and cons on if we want the taxpayers to pay for it over time or do we want the credit unions to step up and take the hit to show we are a different type entity than the rest of financial institutions. We don’t know how that divides in the credit union community and that’s probably something we need to get a better handle on. Send in your e-mails to us or send them in to your trade association so we can get a better feel for what the community has a preference for out there.”
NCUA Insurance Director John Kutchey said the NCUA does not favor one solution over the other. “Where the industry wants to go, as the regulator, we’re behind it. But you as an industry, you’ve got two ways of solving this. If you solve it internally, the con of that is the charge-up funds that you've got to deal with, and there’s going to be a hit to your bottom line and there’s going to be a hit to your net worth.
"The pros of that is the political capital that the industry could gain in relation to future taxation, in relation to maintaining an independent regulatory and insurance structure and having the influence over that system in future legislation as it relates to your institution. The flip-side of that is TARP funds or Treasury injection. The pro of that is being able to spread the cost over time or forgoing the cost altogether. The negative of it is credit unions become, as I understand it, much more susceptible to taxation.”
Another issue under consideration is if the system should take a one-time hit or spread the charges over four to five years years. Pursuing the latter option would require legislative and Treasury approval.
“There has not been a consensus on how to approach some of these things but one of the core questions that comes up is if the industry wants to take this loss in one year or do you want to stretch it over several years so that you’ll be taking a 12 to 15 point hit over four to five years to pay for this or would you rather deal with a 60 basis point approach in year one,” explained Kutchey.
He likened the first strategy to removing a Band-Aid gradually, and the second approach to ripping it off quickly.
“That’s something you’re going to decide as an industry and you’re going to need to work through the legislative process to decide what the majority of the industry wants,” Kutchey said. “I encourage you to talk to your trades and your organizations so your voice is heard about whatever direction you want to go.”
What is the likelihood that more capital will be required from natural-person credit unions?
The short answer is that the NCUA doesn’t now, but “the market is not in our favor right now,” said NCUA Loss/Risk Analysis Officer Steve Farrar.
NCUA representatives said the regulator considered alternatives such as liquidating or purchasing the undervalued corporate credit union investments.
In regard to purchasing the undervalued assets, WHO? said, “The share insurance fund has “$7.5 billion in assets to draw from and the total investment portfolio of the corporate system is $80 billion, so there’s no way the insurance fund could fund a purchase of those investments. Secondly, the purchase of those assets does nothing to reduce the liability and exposure to natural-person credit unions because if the NCUSIF actually took those in they would have to bring them in at market value, so that market value basically becomes a realized loss and that downstream effect would be higher than the uninsured share guarantee and capital notes that we already used.”
The undervalued portfolios also created a problem for liquidating the problem institutions. Marquis said even if the undervalued assets were sold at 50 cents on the dollar, the NCUSIF would take a $30 million to $35 million dollar hit, which would downstream to natural-person credit unions.
"Think in terms of what does that does to you in terms of retraction to your lending ability,” Marquis said. “We don't want to economically create the effect of not making any loans in the community right now. If that retraction took place it really does some serious damage to your ability to make loans in the years to come.”
Kutchey added: “The approach we took we feel very strongly that it is the least-cost alternative to the credit union system. It was not an easy decision to make. This alternative gave us two things: the least cost to credit unions and the most flexibility for resolving this on a go-forward basis."
Ron Jooss is a CUES editor.
