WASHINGTON -
In short, the credit crisis and the billions of dollars in writedowns at some companies is not affecting the safety and soundness of the corporate credit union network according to Brad Miller, executive director of the Association of Corporate Credit Unions. Miller acknowledged he has fielded some questions related to the health of corporates as a result of ongoing deterioration of some portfolios of mortgage-backed securities and collaterialzed mortgage obligations.
“Clearly, there is some risk out there that corporates are addressing on a day in and day out basis, but the corporate network as a whole is safe and sound,” he told Credit Union Journal. “We are well above retained income requirements, which is an important message to get out there.”
Call Report data from Sept. 30 shows, corporates (excluding U.S. Central) had a retained earnings ratio of 2.63%, which Miller pointed out was “well above” the regulatory requirement of 2%. In addition, he said corporates (again excluding U.S. Central) hold total capital of $5.83 billion, with an average 6.73% total capital ratio, compared to the regulatory requirement of 4%.
“Those are the most recent figures we have, but I don’t expect a material change in the fourth quarter,” he said. “We have stringent requirements which we follow on a daily basis. We have a very strict, very structured and very disciplined investment structure, which includes stress testing and modeling the entire investment portfolio.”
For the third quarter of 2007 U.S. Central Credit Union, Lenexa, Kan., reported a $17- million loss, which led Standard & Poors to downgrade the short-term outlook for the corporate credit unions’ corporate to negative, from stable. Despite the downgrade in overall outlook, S&P, affirmed its top AAA and A-1+ counter-party ratings for U.S. Central. These ratings are important when U.S. Central issues its own commercial paper, medium-term notes and other securities.
Unrealized Losses Should Revert To Zero
Miller acknowledged the circumstances in the mortgage market are a concern, especially with some corporates sitting on unrealized losses related to investments in mortgage-related securities. However, he insisted those unrealized losses have “no impact” on corporates’ financials and that the market-to-market unrealized losses are expected to revert to zero as the investments mature.
“Barring any kind of liquidity crisis in the credit union system, corporates are not going to dump these before they pay off,” he said.
For corporates that hold mortgage-backed securities directly, because they have senior position, they are “very confident” of their credit quality, Miller continued. He said corporates have the “proper controls in place” to continue to monitor the exposure and the risk of those investments.
“We are very confident in the credit quality and the intrinsic value of those mortgage backed security holdings,” Miller said.
While unrealized losses have sparked many questions from credit unions, Miller said they are temporary and are not permanent reductions of capital, just as unrealized gains during a bull market are not permanent additions to capital. Because corporate credit unions have sufficient capital, he said the accumulated unrealized losses will not be appearing in any corporate CU’s income statement.
“Corporates will continue to hold them and will realize the value of those investments over the term of the investments. The corporate system has abundant liquidity, so corporates have no need to sell investments with unrealized losses,” he said.
Uncertainty A Certainty
Miller said the ACCU is anticipating the financial markets will remain uncertain for a while. But he added that corporates have “very solid investment portfolios with strict risk monitoring processes,” Miller said they have good funding sources, which should keep at bay the possibility of a liquidity crunch.
“Some corporates have commercial debt ratings, so they can go to the capital markets and generate liquidity, and others can raise money through the system. Corporates do not expect a liquidity crisis, in part because lending is expected to go down. There will be more dollars left in corporates and less lent out.”
For More Information
www.theaccu.org
www.uscentral.org
www.eascorp.org
www.membersunited.org
