WASHINGTON-Just days after NCUA approved a rescue of the corporate credit union network, Congress began to plot efforts last week to ease the crushing $5-billion cost on credit unions.
A key House panel endorsed a bill last week that would stretch out the $5-billion deposit insurance premium credit unions will be charged to pay for the rescue to as long as five years, instead of in one gulp.
Under current law, NCUA must charge the premium all at once, which industry officials worry could threaten the solvency of many credit unions. "Such an extension would lessen the impact of premium charges on credit unions during difficult economic periods," said NCUA Chairman Michael Fryzel, after last week's vote by the House Financial Services Committee.
The measure, which now goes to the floor of the House for a vote, was proposed by congressional credit union champion Paul Kanjorski, the Pennsylvania Democrat who sponsored HR 1151, the landmark 1998 CU Membership Access Act, and more recently, the CU Regulatory Improvements Act, or CURIA. "While credit unions are generally healthy, corporate credit unions have been particularly hard hit by the ongoing economic crisis," Kanjorski said in introducing the measure. "There may be other insurance costs that credit unions will have to bear as the economic crisis continues to unfold."
The action comes as credit union executives around the country are worrying about the effects of the $5-billion premium, which will pay for a $1-billion infusion of cash into U.S. Central FCU and to guarantee all uninsured deposits in corporate credit unions through 2010.
The bill endorsed by the committee would also increase the borrowing capacity for the National CU Share Insurance Fund to as much as $10 billion, from the current $100 million.
The bill would also make permanent last fall's temporary increase in federal deposit insurance coverage to $250,000 per account, including accounts insured by the NCUSIF.
NAFCU President Fred Becker, whose group worked with NCUA to get the credit union measure into the deposit insurance bill, said after the vote they will be lobbying the Senate to get the upper chamber to act too.
NCUA also said last week it is hoping that the ultimate cost of the corporate plan will be less than the $5 billion figure. "That's one of the reasons we didn't assess it yet," said Larry Fazio, deputy executive director of NCUA, of the premium.
There are two main components of the corporate plan, explained Fazio: the $1-billion emergency cash infusion into U.S. Central FCU; and the guarantee of all uninsured corporate deposits through the end of 2010, estimated to cost $3.7 billion. If the guarantee program expires without the need to pay out claims, all or some of those funds could be returned to credit unions.
"We structured this to have the maximum potential to be able to return funds to credit unions. If we don't have to exercise the guarantee we can pay it back as a dividend," said Fazio.
The final cost of the corporate rescue won't be known until PIMCO, the bond fund hired by NCUA to review all corporate-held bonds, completes its estimates for losses; and until the condition of the economy and the corporates comes into closer focus, he said. That means NCUA may not know the amount of the premium and credit unions will not be charged until late in the year.
When that happens NCUA expects credit unions to account for the premium as they are required to under generally accepted accounting principles, or GAAP, said Fazio.
That means the write-down of the 1% National CU Share Insurance Fund deposit by 50 basis points should be taken through the income statement.
And the premium payment, projected now at 20 basis points, will also flow through the income statement. Credit unions over $10 million in assets are required to follow GAAP, so should follow this method, explained Fazio. Though he stressed each credit union should discuss it with its outside auditor.
Credit unions under $10 million are not required to follow GAAP, but will be urged to follow the same accounting treatment, he said.
