WASHINGTON – The Government Accountability Office, the accounting arm of Congress, said today that NCUA’s loss projections for the corporate credit unions meltdown were unreliable and therefore it is not possible to estimate the ultimate losses from the corporate debacle.
The GAO, in a study titled Earlier Actions Are Needed to Better Address Troubled Credit Unions, said NCUA was unable to provide it with the requested documentation to support corporate loss estimates, which are being paid by the credit union system. “Absent this documentation, it is not possible to determine the full extent of losses resulting from corporate credit union failures,” said the GAO. “Moreover, without well-documented cost information, NCUA faces questions about its ability to effectively estimate the total costs of the failures and determine whether the credit unions will be able to pay for these losses.”
NCUA said this afternoon that a CPA audit on the Corporate Stabilization Fund completed last week for 2010, but after the GAO completed its review has satisfied the GAO’s concerns on the corporate loss estimates by giving more accurate numbers. NCUA Chairman Debbie Matz said in a prepared statement the agency is already implementing the GAO’s recommendations on providing more accurate data on the corporate loss estimates.
“We welcomed the GAO review, and NCUA fully agrees with the recommendations contained in the GAO report,” said Matz. “In fact, we were already working to implement these recommendations. With completion of the 2010 Corporate Stabilization Fund audit last week, NCUA has complied with the first GAO recommendation and will continue to regularly update cost estimates in the future.”
But it's clear the GAO report is referring to more than certified audits, but the corporate loss estimates that NCUA has provided to credit unions over the past three years as the costs of the corporate resolution have soared.
NCUA’s estimates of the corporate losses have created controversy and anger among credit unions, which are paying the costs of the corporate resolution. NCUA's cost projections have also caused great uncertainty among credit unions as the budget to pay the costs of the resolution. The agency originally estimated the cost at $1 billion in January 2009, as U.S. Central FCU began to teeter, then raised the projection to $6 billion when it asked Congress to create a segregated fund to finance the corporate resolution, now the estimates are as much as $16 billion.
To date, credit unions have paid $3.3 billion in assessments to fund the NCUA corporate resolution and lost more than $6.5 billion of their capital in the failure of the five corporates, U.S. Central, WesCorp FCU, Members United Corporate FCU, Southwest Corporate FCU and Constitution Corporate FCU.
The GAO said the continued corporate resolution, which is being financed with U.S—backed loans, poses a potential risk to the U.S. taxpayers and creates a moral hazard because it could encourage other credit unions to take big risks while knowing the federal government will be there if it fails.
“Moral hazard occurs when a party insulated from risk may behave differently than it would behave if it were fully exposed to the risk,” said the GAO. “In the context of NCUA’s actions to stabilize the credit union system, moral hazard occurs when market participants expect similar emergency actions in future crises, thereby weakening their incentives to manage risks properly.”
“Furthermore, certain emergency assistance can also create the perception that some institutions are too big to fail,” the report states. “In general, mitigating moral hazard requires taking steps to ensure that any government assistance includes terms that make such assistance an undesirable last resort, except in the direst circumstances, and specifying when the government assistance will end.”
The GAO also said NCUA failed to heed early warning signs on many credit union failures over the past three years and needs to adopt new measurements to determine whether early intervention is necessary.
As many as 29 of the 85 natural person credit union failures since 2008 studied by GAO were due to fraud or employee malfeasance, according to the study, which suggested that NCUA use an indicator other than the prompt corrective action minimum capital counts to determine whether early intervention is necessary.
GAO also found that for many of the failed credit unions, other enforcement actions were initiated either too late or not at all. GAO has previously noted that the effectiveness of PCA for banks is limited because of its reliance on capital, which can lag behind other indicators of financial health. GAO examined other potential financial indicators for credit unions, including measures of asset quality and liquidity, and found a number of indicators that could provide early warning of credit union distress. Incorporating such indicators into the PCA framework could improve its effectiveness.
