By Mary Arnold
Why now and what does it mean to natural-person credit unions were two of the audience questions addressed yesterday by David Marquis, executive director of NCUA, during a free National Association of Federal Credit Unions archived Webcast.
Let's start with "why now?" which topped the list for the 1,200 Webcast participants.
Marquis explained that while NCUA had been tracking corporate liquidity on a daily basis for some time and had placed some restrictions on their investment actions, it became necessary to take immediate action when it learned U.S. Central would report other-than-temporary impairments of $1.2 billion on its year-end financials, turning unrealized investment losses into realized expenses and severely threatening its capital position.
"The biggest issue was the leverage on the corporate balance sheets and what happens in the credit markets if credit on U.S. Central's books gets called or there is a run on deposits," Marquis said. NCUA feared trouble would spread to natural-person credit unions, leaving thousands of CUs with problems.
"We needed to stabilize liquidity first. Then let (U.S. Central's troubled) assets pay out over time," added John Kutchey, acting director of NCUA's Office of Examination & Insurance. "This was the best scenario, industry wide."
When will the insurance assessment come? "When the fund drops below 1.2 percent, we have to restore it," Marquis explained. "Not like in 10 seconds," but within the established billing cycle of March and September.
He said the current plan is to bill for the infusion in September when the amount needed will be clearer. "We hope to only have to bill one time," he added, alluding to the possibility that the $3.7 billion loss reserve currently being estimated could fall short. There is also possibility Congress will approve a five-year time frame for replacing National Credit Union Share Insurance Funds, providing a reprieve for CU financials.
To help NCUA get a better handle on potential real losses in U.S. Central's portfolio, the agency has engaged PIMCO to study each investment and its underlying mortgages. "The real credit loss could be just a fraction of the OTTI loss" that U.S. Central is facing—or it could be greater.
Asked why NCUA can't access TARP funds, Kutchey noted that if TARP were provided as a loan, it would help the liquidity situation, but not the capital side. "Be careful what you wish for," he added. If TARP funds were used to buy up troubled assets, "What price would the assets be sold at? It could cost more than the program on the table."
Besides the $1 billion of capital infused into U.S. Central from the NCUSIF, NCUA temporarily is guaranteeing all corporate deposits, even those over $250,000, to help keep credit union investments in the corporates. Marquis said previous attempts to speak directly with larger credit unions about maintaining their corporate deposits had had the opposite effect of money being pulled out.
Marquis also said that NCUA "can reduce the $3.7 billion in a shorter term if corporate balance sheet structures improve," and that increasing corporate liquidity is one way to do so. If credit unions end up over-paying to the insurance fund, Marquis said, "a dividend payout could potentially be in the future."
The System Investment Program funds credit unions are purchasing from the Central Liquidity Fund and, in turn, placing into corporates at a 25 basis point, fully guaranteed spread greatly improve corporate liquidity because it is new money flowing in, Marquis said. He noted that SIP funds "inflate credit union balance sheets as short-term borrowing transactions and added that NCUA is "providing direction to examiners to take this into account, so SIP credit unions won't be penalized."
Following up on this point, Marquis said this information would be in a supervisory letter to NCUA examiners that would also be shared with state examiners and made public to credit unions.
He also emphasized that examiners are being instructed to look at credit unions' financial results net of the impending insurance assessment. "Our examiners get it," he said. "We don't want credit unions to make critical mistakes (or take on undue risk) to manage this issue.
"Examiners should look at the credit union separately from this industry event; your business models should show that you are adjusting to your own situation and that your balance sheet can stand future interest rate increases."
Still, those CUs that fall under minimum reserve requirements will be required to file capital restoration plans, Marquis said.
$8 billion of SIP has been purchased in two rounds so far. When asked where the $8 billion has gone, Marquis replied that the majority went to U.S. Central, explaining that infusing the "top tier (of the CU system) feeds the rest of the system."
To continue the unlimited deposit guarantee after Feb. 28, 2009, corporates will need to enter into what Marquis called supervisory agreements with NCUA, similar to the "letters of understanding " troubled natural-person CUs are familiar with. "This process will start at the end of the week," he noted.
NCUA is also looking at different regulations for the corporates but, instead of drafting something for comment, Marquis explained that NCUA issued an Advance Notice of Proposed Rulemaking with 60 days for CUs to provide feedback on the role of corporate credit unions and whether to amend corporate regulations pertaining to capital; permissible investments; management of credit risk and liquidity; and corporate governance. Comment here. According to Marquis, the NCUA Board is also willing to listen to alternative solutions for corporate stabilitization. "They are open to solutions that are legal and represent the industry," he said. Mary Arnold is VP/publications for CUES.
