By Ron Jooss
The National Credit Union Administration was hit with 500 questions from concerned credit union leaders during yesterday's Webcast explaining its decision to put US Central Credit Union and Western Corporate Credit Union into conservatorship last Friday. About all it could offer in return was more bad news.
NCUA Executive Director David Marquis said US Central and WesCorp were placed into conservatorship to reduce the credit union system's exposure in the face of estimated loss projections, to maintain greater control over the corporates and improve the transparency of financial information provided from the two institutions.
"It's very vital that we maintain confidence of member CUs and especially the payment system," Marquis said.
The CEOs, boards and some senior executives of the corporate credit unions have been removed, with NCUA-appointed officers assigned in their place.
In what he said was "a hurtful point," Marquis said projected credit losses have entirely wiped out paid in capital and member capital share accounts at WesCorp under the NCUA's base, pessimistic and optimistic test case scenarios."
At US Central the best case scenario reveals that 77 percent of paid in capital and membership share accounts have been impaired. In addition, all of the NCUA's $1 billion emergency infusion is gone.
Marquis said natural person credit union shares—but not capital—are insured up to $250,000, with any additional amount guaranteed under NCUA's Voluntary Temporary Corporate Credit Union Share Program and backed "by the full faith of the U.S. Government."
Marquis said the NCUA is holding a closed board meeting on Thursday, March 26, in an effort to hammer out a way for credit unions to spread the cost of the impairment. But any fix will take legislative approval.
When asked why the corporate credit unions weren't allowed to fail Examination and Insurance Director Melinda Love said, "One of the reasons we took the conservatorship action was to ensure that the payment system and settlement processes continued uninterrupted. Had we gone ahead and just let the two corporates fail, that would have created an interruption in the payments system that would have come back and been felt by all of the members of all your natural person credit unions."
Marquis added that allowing the institutions to fail would also have meant putting their distressed securities on the market, rather than letting them continue paying down over time.
"We can't emphasize enough that it's vital to maintain liquidity in the system," he continued. "Since Jan. 28 credit unions have done a very good job in helping in that arena as they've taken a great deal of external borrowings off the table."
Yesterday, the NCUA released a statement that due to the success of the three Credit Union System Investment Program offerings there will not be an April CU SIP offering. Over $8.2 billion was issued in the first three subscriptions. Corporate credit unions used the funds to pay down external borrowings, freeing collateral for future contingency liquidity needs.
Although the NCUA has said its examiners will be flexible with credit unions that approach Prompt Corrective Action status because of the expected reductions in return on assets and net worth, Marquis did not provide details. (See "Corporate Stabilization: The Longer View" for a previous NCUA explanation of PCA implications.)
"Our examiners have been told and we've worked with them more than once on taking these items into consideration," Marquis said. "That doesn't mean it's a complete free pass. We do have to look at the safety and soundness of the institution as it runs its own business and how its business model is working in this environment." (See also NCUA's Supervisory Letter No. 09-01.)
More bad news on the corporate credit union front is still to come. Marquis said US Central's absorption of paid in capital and membership capital shares will roll down to other corporate credit unions with capital investments in US Central and, depending on how hard this hits their balance sheets, will affect natural-person credit unions that invest in those corporates. Members of WesCorp will lose all their PIC and MCS.
Ron Jooss is a CUES editor.
After this Webcast, CUES held a teleconference on communicating industry issues like this with your staff and the media.
