BIRMINGHAM, Ala.-NCUA's decision to cover corporate losses and inject $1 billion into U.S. Central may turn a number of natural person credit unions balance sheets from black to red over the next two years according to one of the administration's past chairmen.
"It may well make it impossible for some credit unions to make the turnaround that they were hoping for after a very tough 2007 and 2008," said former NCUA chairman and principal partner at Dollar Associates, Dennis Dollar. "It will likely drive many more credit union mergers as some CUs will decide they need to combine to achieve economies of scale to survive this tremendous cost to rebuild the insurance fund."
The biggest bottom-line problem with the bailout, Dollar maintained, is that the new premium increase is designed to put $4 billion back into the insurance fund, not to simply cover corporates' losses. The former NCUA chief said frustration with the sudden decision is bubbling throughout the cooperative movement.
Alternatives Deserve Proper Hearing
"One of the frustrations I have heard from my clients is that they don't think other alternatives have been given a proper hearing. It may turn out the premium may be the best way to share the pain but they'd like to have a forum with NCUA to make that case," he pointed out. "I think credit unions would be upset about taking that loss, but they could probably live with it if they knew that would be the end of it. But we don't know how long this current economic crisis is going to last."
Alternatives to the insurance assessment all have their drawbacks though. Lobbying strongly for TARP funds opens up a wide angle of attack from the banking industry, which may actually emerge stronger than ever once the economic crisis subsides, Dollar argued. Secondary capital investments into the corporate infrastructure from natural person CUs would keep many balance sheets on the positive side, but would require a massive coordinated effort.
Members are likely to feel the pain, too, as credit unions put the squeeze on their budgets. Riskier loans would likely be shelved, deposit rates could drop and investments for future growth would have to be put on hold.
"A premium of this magnitude in 2009 will postpone or eliminate almost any plans for new branches, new products, replacing equipment, replacing staff and even some lending," Dollar said, adding whatever the final cost to rebuild the insurance fund would be money taken "out of the membership."
