ALEXANDRIA, Va.-Strapped for liquidity as paper losses grow on their asset-backed securities, the corporate credit unions have proposed a comprehensive restructuring of the system that would provide additional sources of funds, boost capital and position the corporates as providers of new services to natural-person credit unions.
The core of the plan, submitted by the Association of Corporate CUs to NCUA last month, is a vast expansion of the emergency lending fund known as the Central Liquidity Facility, which has been used on an increasing basis by NCUA to help troubled credit unions weather the current economic crisis.
The corporates' plan would use the CLF to pump as much as $15 billion of new funds into the corporates or even be utilized to move billions of dollars of distressed assets off the corporates' books.
The plan notes the negative trends among the 27 corporates and U.S. Central, including a 14%, or $11 billion, decline in shares between September 2007 and September 2008; a 40% increase in loans to credit unions to a total of $4.6 billion at Sept. 30, 2008, and a 21% increase in external borrowings for the corporates to $15.5 billion.
Plan Alludes To 'Critical Concern'
Not mentioned specifically is a total of almost $18 billion of unrealized losses on distressed securities the corporates were holding at Nov. 30. The plan does allude to a "critical concern" of the "continued downward trend in the market value of investment securities," which is limiting the amounts the corporates can borrow.
ACCU's Executive Director, Brad Miller, said the plan focuses on three major areas: providing additional liquidity to the corporate system; increasing so-called Tier One capital, and proposing new functions for the corporates to position them for a changing environment for CUs.
"We're at the point where we're just waiting to get some feedback from NCUA," said Miller, who declined to discuss the details of the plan.
NCUA would not comment on the plan.
But according to a copy of the proposal obtained independently by Credit Union Journal, the plan would also entail the CLF making a $10-billion investment in U.S. Central FCU, and as much as $5 billion into other corporates that are carrying large amounts of distressed securities on their books.
The corporates also propose having NCUA create some kind of deposit guarantee program for the corporates, on top of the current federal deposit guarantee of $250,000 per account, in order to shore up confidence in the corporate network. The guarantee, which would be provided through the National CU Insurance Fund, would be "consistent with actions other federal agencies have taken to support the commercial and inter-bank funding markets.
Corporates would pay an annual premium of five basis points on these insured shares in order to help secure funding from natural person credit unions that are currently investing outside the corporate network, particularly the large credit unions.
The plan also calls for the corporates to undertake comprehensive capital building by raising core capital to 4% by the end of 2009 (U.S. Central would have until the end of 2010), by increasing paid-in-capital at those corporates that need it, by de-leveraging corporate balance sheets, and by increasing earnings.
Increasing earnings, something sought by every entity, would be accomplished by lowering operating expenses of the corporates, improving net interest margins and creating new revenue sources.
The corporate plans suggests that the corporate credit unions reposition themselves to provide similar services as the Federal Home Loan Banks, by offering a variety of different loan and savings products.
A CLF History Lesson
The CLF was created in 1974 as an emergency liquidity source for needy credit unions but went almost unused for the past 10 years while credit unions enjoyed an unprecedented period of prosperity. But as the economy's troubles have spread through the credit union movement Congress agreed in September to expand the size of the CLF-based on loans from the Treasury Department's Federal Financing Board-to $40.5 billion, from its previous $1.5 billion. Since then, NCUA has made the emergency loan fund the center of its efforts to shore up CUs. Under the corporates' plan, the funding provided by the CLF would be available to eligible corporates for a two-year period, until Dec. 31, 2010. The collateral and other requirements would be similar to those required by the Federal Reserve Banks for financial institutions eligible for primary credit.
Participating corporates would enter into a supervisory agreement with NCUA requiring them to use the CLF funding to repay external borrowings.
