Periodically through the last nine months of the financial-economic crisis credit union spokespersons have called for government assistance for credit unions. NCUA Chair Mike Fryzel wrote former Treasury Secretary Paulson and current Secretary Geithner urging credit union access to TARP Funds. Both national trade groups as well as some state league Presidents have also spoken of the need for such assistance. A few credit unions, confronting severe housing downturns in their markets, have lobbied individually for external assistance.
A parallel thought process was behind the NCUA-industry support for HR 2351, authorizing NCUA to borrow an initial $6 billion for a Corporate Trust Fund within the NCUSIF, plus an additional $30 billion if required. The implication is that credit unions could not take care of their own capital and liquidity challenges with their own resources.
These premises are factually incorrect and dangerous to the cooperative self-help model. Moreover, suggestions that credit unions need outside governmental funds can only assist those who want to make credit unions a part of a revised regulatory scheme subject to the same constraints as those who created the problem.
Record Liquidity Levels-Excess Capital Notes
The March 31, 2009 consolidated financial data showed credit unions with the highest amount of liquidity ever, over $260 billion in investments. Over 62% was invested for less than one year; over $80 billion was in the corporate network, an increase of $21.8 billion from December 2008.
But the more important news, is that US Central, contrary to public statements made by NCUA on March 23 that the "credit losses . . . far exceed their (WesCorp and US Central's) capital," is indeed solvent with almost $1 Billion in membership capital shares--after all accounting adjustments. Additionally the capital note for $1 billion deposited in January is completely intact! This result was documented in a May 14 letter from US Central to its members.
Moreover, pending release of final audits, preliminary indications are that every corporate, except WesCorp, has positive capital at March 31, 2009.
Meanwhile credit unions, as directed in the Agency's January 28th analysis, have written off US Central's capital note. In fact the data at March 31 suggests that credit unions collectively have expenses over $6 billion of the total NCUSIF announced losses of approximately $7 billion. This total includes the $1.2 billion from the WesCorp capital write off plus the $5.9 collective NCUSIF insurance expenses. Instead of extending this expense recognition over five or seven years, the vast majority of credit unions elected to recognize these expenses now and move on.
But what about the $1 billion capital note?
Now that US Central is solvent and credit unions have fully expensed the capital note, that money is available for reallocation to natural person credit unions. This reallocation could assist the recovery of every credit union that reports a net worth ratio below 7%. Contributing capital to these problem situations has three significant advantages for the credit union system:
- It allows credit unions with strong franchises and capable teams to turn troubled situations around;
- It saves the insurance fund, when those turn-arounds occur, from the immediate costs of liquidation or merger;
- The potential for repayment of the funds means that the NCUSIF can actually recover losses originally expensed and reduce future costs of the fund.
How much would such an effort take of the $1 billion all of which has already been expensed?
At March 31, 184 credit unions with assets of $21.2 billion reported net worth ratios below 6%. To restore their net worth ratios to an adequately capitalized level would require capital notes of $329 million.
Another 292 credit unions reported net worth between 6-7%. Bringing this group with $94.0 billion in assets up to a well capitalized level would require notes totaling $390 million.
It should be recognized that most of these credit unions have fully funded allowance accounts for their delinquent loans, so that their capital levels are actually much higher than the net worth calculation used for PCA compliance. In fact, their collective coverage ratio is 82% an amount nearly equal to the industry average of 83%.
After all these actions, there would still be over $280 million of the original $1 billion capital note remaining!
Taking Care of Our Own-Willing a Legacy for the Future
Capital notes are a traditional form of NCUSIF assistance. They were widely used in the 1980's and 1990's along with 208 guarantees. Many of these credit union recipients are leaders today. For example SACU in San Antonio had a negative net worth of over $35 million (over -6% of assets) when Jeff Farver arrived in the early 1990's. Today the credit union with almost $2.8 billion in assets is a leader in manufactured housing finance in the United States as well as a credit union with an extraordinary record of innovation and support for collaborative efforts.
Not every credit union receiving notes may turn around, but this assistance can bring new life, hope and options, and at a minimum create more attractive merger partners if problems cannot be overcome. Today troubled credit unions are being forced to reduce their loans and shares to try to maintain net worth ratios, a process that undermines long term member relationships and destroys franchise value.
The Time to Act is Now
In converting the unneeded capital note at US Central, for which the entire system has already paid, into a revolving capital fund, the entire movement has access to positive options for correcting problems. In many instances the problems encountered could not have been prevented. That is what "systemic" risk means.
The funds are available now; the need is now; the precedents are there (US Central is the most recent!) and the examples are positive. Can those credit union leaders who were looking at the federal government as a solution, now turn their energy and voice to launching this recovery effort within the system?
The NCUSIF funds are credit union funds, not the federal government's. They are common capital collected for the well being of the credit union system. Creative and effective use of this capital pool is a critical responsibility to insure the future stability and soundness of the credit union system. Innovative and responsive leadership can make a decisive difference not just in individual credit union's recovery, but also in every credit union's confidence in the system's future.
Most importantly, it could begin to heal the rift that has occurred between NCUA and credit unions.