WASHINGTON - With the mortgage crisis cutting off liquidity in many markets, many of the nation’s largest banks are turning to an unlikely source of new funds: credit unions.
Increasing numbers of credit unions have turned away from the staple investments of agency securities issued by Fannie Mae or Freddie Mac and have increased their holdings of bank issued CDs and notes. These bank-issued investments are stable and secure and typically offer a premium, according to Eli Vasquez, chief financial officer at American Airlines FCU, who typically keeps the credit union’s $2.2-billion investment portfolio short, an average duration of just six months. “We get good diversification with bank CDs,” Vasquez said. “They’re very high quality, short-term CDs.”
Bank CDs, which are typically issued in denominations of $99,000, are federally insured up to $100,000.
John Wright, chief financial officer for Desert Schools FCU, said he has been picking up spread by buying bank notes. The bank notes he buys are publicly traded, are senior debt of highly rated banks and typically pay 50 basis points to 60 bps over Treasuries, he said.
Data compiled by CUNA shows that credit unions had more than $19 billion invested in bank and S&L issues at the end of May, up from $16 billion a year ago, indicating both an increase in investment funds for credit unions and the growing popularity for bank securities, according to several observers. At the same time, many large banks are seeking new sources of liquidity, while credit unions have excess funds available.
“We’re at a period of time when loan demand isn’t at its highest, so we’re building liquidity,” said Brian Turner, director of Southwest Corporate Investment Services, a CUSO of the corporate credit union.
Other credit unions see opportunities elsewhere. Steve Brewer, chief financial officer for $850-million Michigan Schools & Government CU, said he is buying bank notes too, but is also investing in high-grade corporate bonds–as permitted under state law. Among the issuers are General Electric, JP Morgan Chase, Credit Suisse and Citicorp.
Christopher Sullivan, who manages a $1.2-billion portfolio for United Nations FCU, said he is focusing lately on pools of guaranteed loans issued by the U.S. Small Business Administration, bonds issued by the Federal Home Loan Banks, Farm Credit Administration and Ginnie Mae, as well as the Tennessee Valley Authority, and taxable municipal bonds.(c) 2008 The Credit Union Journal and SourceMedia, Inc. All Rights Reserved.http://www.cujournal.com http://www.sourcemedia.com
