WASHINGTON - The corporate CU network has found itself in the news in recent months as a result of how the ratings agencies view their balance sheets, the performance of certain investments, and other issues. But Brad Miller, executive director of the Association of Corporate Credit Unions, said he believes the chance unrealized losses will become realized losses is “negligible.”
Miller, the former president of Montana-based Treasure State Corporate, told Credit Union Journal the corporate network remains confident in its ability to ride out the so-called “credit crunch.” Below, Miller shares some of his other thoughts.
CUJ: What is your perspective on how corporates are communicating to member CUs on fair market accounting rules, unrealized losses and other safety and soundness issues?
Miller: People are still watching. I have not had a whole lot of feedback from natural-person credit unions other than that their corporates are doing a good job of communicating.
There are obviously challenges in dealing with this market dislocation, but we really feel strongly in the portfolios corporates have maintained. There are unrealized losses sitting there, but that reflects an illiquid mortgage backed securities marketplace–there are no buyers out there–rather than the true economic value of these securities.
CUJ: Are unrealized losses a potential problem going forward?
Miller: No one can predict for sure what it is going to be like, but I think the probability of realized losses in the corporate network is negligible.
The corporates buy these securities to hold them to maturity. The corporates list the securities as “available for sale” due to their function as a source of liquidity, but they have other very strong funding sources. If they need liquidity right now, corporates can tap those sources rather than sell these securities in a distressed market. Liquidity is already very high in the corporate network, and they have other sources.
CUJ: What are some of the best practices you’ve seen in communicating with member CUs?
Miller: I know there are a number of corporates that are having monthly–if not more frequent–updates on their entire investment portfolio.
We cannot communicate enough, in my opinion. We need to explain what is going on and share as much as possible with natural person credit unions. I don’t get a lot of feedback directly from natural person credit unions, but what I am getting is they are happy with the communication they are receiving and they are confident their corporate is on top of things.
Corporates just need to continue to communicate and be as transparent as possible to reassure their natural person credit unions.
CUJ: What do you foresee for the corporate network over the next six to 12 months?
Miller: Despite all of the top line disruption from the market dislocation, the ROA for the corporate system is very strong. Many corporates had record earnings last year, and the network as a whole was very strong.
Unrealized losses got most of the attention, but when you look beyond the paper loss issues to the overall financial performance of corporates, things have been very strong. Last year was very strong, and strong performances have continued through April and May of this year.
CUJ: What is the overall state of the corporate network?
Miller: My basic message is: we’d like the market dislocation to turn around, but natural person credit unions should have full confidence in the corporate system as a whole.
All of the corporates are doing well from a capital perspective. We just need the market to improve a little bit, and we would like to see credit spreads narrow – because that is what is causing the unrealized losses. As credit spreads improve, the market value of the securities will increase, and will reduce the unrealized losses. Either the securities mature and go off the books, or we will return to a more normal market.
We have seen some positives in the market, and there have been some fairly good sized deals in the past few weeks. We just need that to be sustained. From my vantage point, I think corporates have done a very good job managing things.(c) 2008 The Credit Union Journal and SourceMedia, Inc. All Rights Reserved.http://www.cujournal.com http://www.sourcemedia.com
