Most Stabilization Costs Behind Us
The light at the end of the tunnel, however, is probably a few years away.
The 2012 financial statements for the Temporary Corporate Stabilization Fund provide some sobering but promising information. There’s light at the end of the tunnel for credit unions that are paying for losses on the “legacy” assets acquired from the five corporate credit unions that failed during the financial crisis and Great Recession.
First the sobering part: So far, losses to credit unions have been very large, totaling $9.7 billion: $5.6 billion in depleted capital of the five corporates that credit unions previously owned, and $4.1 billion in corporate stabilization fund assessments paid through 2012.
Of the $5.6 billion in depleted capital, slightly more than $3 billion was credit unions’ invested capital. That had to be written off. The balance of a little more than $2 billion was the corporates’ retained earnings. Since these retained earnings had not been recorded as income by credit unions, the loss of this $2 billion-plus has not affected credit union financial statements. But credit unions ultimately owned the retained earnings, so that, too, is a real loss.
Now the bright side: The vast majority of the costs of corporate stabilization are now behind us. First, there’s the $9.7 billion already paid. Second, with the recovery in the housing market, estimates of eventual losses on the remaining legacy assets—which are largely mortgage-backed securities—have declined.
The Corporate Stabilization Fund was established in its current form in the fall of 2012. At that time, NCUA estimated the total losses on the legacy assets to be about $15 billion (they reported a range of $13.9 billion to $16.1 billion). If those estimates were still in force, there would still be another $5.3 billion in assessments yet to be paid ($15 billion in estimated losses minus the $9.7 billion paid so far).
NCUA’s estimate of eventual losses, however, has fallen by $2.5 billion, to $12.5 billion—the range is $11.3 billion to $13.6 billion. (This estimate and additional information about the fund is available on NCUA's website). That leaves an estimated range of remaining assessments of $1.6 billion to $3.9 billion, or $2.8 billion using the midpoint. That would require about three more annual assessments at last year’s rate of 9.5 basis points of insured shares.
With further improvement in the housing market, it’s likely the eventual losses will be at, or possibly even below, the low end of the estimated range—closer to $1.5 billion than $4 billion. But the actual losses won’t be known for several more years. In the meantime, all we can do is revise estimates. As time passes and the housing market improves, those estimates also improve.
Let’s assume that the current estimates of $2.5 billion for the remaining losses are close to the final outcome. That would still leave a problem for NCUA in managing the liquidity of the stabilization fund as it winds down. The initial gap of $5 billion between the estimated value of the legacy assets and the liabilities of the corporates—the loss that credit unions have to cover with assessments—was borrowed from the U.S. Treasury to allow credit unions to pay those losses over several years rather than all at once.
Much of the improved cash flow from the legacy assets won’t be realized until later in the decade, and the fund won’t expire until 2021. For various reasons, NCUA would prefer to pay down the Treasury borrowing sooner rather than later.
One option would be to continue with credit union assessments even after the expected losses had been covered, in an amount sufficient to pay off Treasury. But that would mean collecting about $2.5 billion more in assessments than the expected final losses—six more years of assessments instead of three.
In that event, the fund would have to rebate the extra $2.5 billion toward the end of the decade, when a final accounting is made. That would not be a good idea. Assessments are a credit union expense, so they would cause the understatement of credit union earnings for the next few years, followed by an overstatement of income a few years later.
CUNA is urging NCUA to find an alternate funding mechanism if it wishes to pay down the Treasury borrowing before the end of the fund’s term.
BILL HAMPEL is CUNA’s chief economist and senior vice president of research and policy analysis.