October 1, 2010
On Friday, September 24, the NCUA took action on the corporate credit union issue that affects nearly every natural person credit union in Washington. The NCUA’s actions and plans are extremely complicated and are still being interpreted by the credit union industry. The following is a simplified explanation. For more information, including suggestions on how to discuss the NCUA’s actions with your members, boards or staff, please read the CUNA documents: Board Talkers on NCUA Corporate Action, Safe And Sound Talking Points, Corporate Credit Union Talking Points. CUNA President Bill Cheney has also produced a video explanation of the actions. It is available here.
For a regulatory-related explanation, which includes more details, please contact the League’s Compliance Department.
The NCUA took three actions:
- They placed three more corporates into conservatorship: SW Corp, Members United, and Constitution Corporate. Along with WesCorp and US Central, that brings the total number of corporates under conservatorship to 5.
- They released the final corporate rule, which once implemented will require major changes in the corporate system.
- They announced the long-awaited “legacy asset” plan to deal with the roughly $50 billion of distressed assets still on the books of the five conserved corporates.
The agency’s plan for dealing with the poorly performing legacy assets on the books of the corporate credit unions includes transferring performing assets to a new corporate credit union, while leaving the legacy assets under agency management. Despite being AAA rated at the time of purchase, these legacy assets have experienced significant losses on paper.
Because accounting rules require the corporates to mark their investments to market prices, the corporates were required to recognize significant real estate-related losses. This, in turn, forced the NCUA to conserve the credit unions. The NCUA projects that in the end, actual losses to the credit union system will total $14-$16 billion.
Of that $14 - $16 billion expected loss, $5.6 billion has already been extinguished by the capital of the five conserved corporates, and $1.3 billion has already been funded through insurance fund assessments against natural person credit unions. This leaves $7 - $9.2 billion in remaining projected assessments under a conservative estimate. Converting corporate legacy assets to investment-grade bonds and extending life of the Corporate Stabilization Fund to 2021 gives credit unions longer to pay the stabilization assessments.
Under the NCUA’s plan, legacy assets will be converted to NCUA Guaranty notes and will be available as an investment guaranteed by the full faith and credit of the U.S. government. The notes will be available on the open market and credit unions can choose to purchase them, as long as the credit union has done proper due diligence.