'It's Not a Bailout'

Key points for board members about the NCUA corporate actions.

September 30, 2010

The National Credit Union Administration’s (NCUA) actions on corporate credit unions will have little or no impact on members, it’s not a bailout, and credit unions will cover the full costs.

These are three key talking points from the Credit Union National Association (CUNA) to help credit union CEOs brief their boards about NCUA’s actions on corporate credit unions and legacy assets.

CUNA President/CEO Bill Cheney appeared on Fox Business Channel Monday to correct credit union "bailout" claims. Cube TV Video courtesy of the Michigan Credit Union League.

It’s important to correct any misperceptions—including those reported in the media—about the corporate credit union and legacy asset plans.

Following are some important talking points.

NCUA took three key actions on corporate CUs

The agency placed three more corporates into conservatorship (for a total of five), unveiled its plan for resolving the “legacy assets” held by the conserved corporates, and adopted a new set of corporate credit union regulations.

“Conservatorship” means the corporates are still operating normally but the U.S. government has taken them over. “Legacy assets” refers to mortgage-backed securities held by the corporates.

The new regulations are designed to prevent credit unions from facing a situation like this in the future.

Deposits are covered by federal insurance

The deposits that regular credit unions have in the conserved corporates are federally insured up to $250,000 and backed by the full faith and credit of the U.S. government.

The U.S. government has also guaranteed deposits beyond $250,000 in these institutions. Therefore, the excess funds credit unions have invested in these corporate credit unions are fully protected.

There’s little or no impact on members

The actions taken by NCUA are meant to protect credit unions and their members. The agency’s comprehensive plan and fast action will ensure that members see little or no impact from the conservatorships.

As NCUA Board Chairman Debbie Matz said last week:

  • Not one credit union depositor has lost even a penny in a federally insured credit union account;
  • There have been no disruptions in service to consumers who do business at credit unions; and
  • Overall, our nation's credit union system remains strong and secure.

It’s NOT a government bailout

Credit unions, not taxpayers, will pay all of the costs for this. There are about $50 billion in troubled assets which, eventually, will probably return a bit more than $40 billion. That means the ultimate loss credit unions must cover will be less than $10 billion.

No matter what the amount, credit unions have the resources, and have been given an extended amount of time—until 2021—by Congress and the Treasury Department, to pay the bill. This means credit unions at large face no threat and taxpayers will not pay the costs.

An estimated $8.1 billion remains to be paid

The latest, revised estimated future losses on the legacy assets are in the range of $14 billion to $16 billion. Using $15 billion as an estimated midpoint, figuring that $5.6 billion has already been covered by the extinguished capital of the conserved corporates—and that $1.3 billion has already been paid by credit unions from last year’s and this year’s assessments—that leaves an estimated balance of $8.1 billion.

Credit unions must cover this cost. The final total could be higher or lower; the numbers used here are only estimates.

The total cost depends on share growth and other factors

Credit unions have until 2021 to pay the costs. Assuming the previous figure holds, the amount credit unions will pay depends on how their shares grow.

If shares and deposits grow 5% each year for the next 11 years, the average annual assessment on credit unions will be about 0.07% on average assets (i.e., 7 basis points [bp]). Starting next year, the assessment will be around 9 bp and then will fall to 5.5 bp in the last year, 2021.

These are estimates. If savings grow faster than 5% (and/or/if remaining losses are less than $8.1 billion), the average cost/assessment will be less than 7 bp per year or vice versa.

There’s no way to calculate total costs with precision

No one can predict or claim to know with certainty what the total costs (and losses) will be. The faster the economy and the housing markets recover from the recession, the lower the losses and costs will be to credit unions.

CUs didn’t cause this problem

While credit unions have experienced some collateral damage during this recession (from member job losses, declining home values, etc.), we didn’t cause the problem.

Rep. Barney Frank (D-Mass.), the chairman of the House Financial Services Committee, has said more than once, “If credit unions made all of the mortgage loans, then there would have been no subprime crisis, and therefore no economic crisis.”

In today’s economy, natural-person credit unions continue to be a safe haven and offer great value to consumers.

We are well capitalized

Credit unions as a whole are very well capitalized, with an average capital-to-assets ratio of nearly 10%. That’s considerably higher than the 7% industry standard for being “well capitalized.”

This 10% capital means credit unions are well positioned to absorb the costs of resolving the corporate issues with little or no impact on members.

CUNA continues to analyze the impact these rule changes and the asset plan will have on credit unions.