ALEXANDRIA, Va. – NCUA is expected to announce a plan over the next few days to help rescue the corporate credit unions from unrealized losses on their vast securities portfolios by allowing the corporates to borrow from agency’s emergency loan fund, the Central Liquidity Facility.
Though the CLF was set up to provide emergency loans for regular credit unions, known as natural person credit unions, NCUA believes it has the authority to extend CLF loans to the corporates, several sources told The Credit Union Journal this weekend.
The NCUA initiative comes at a time when unrealized losses on the corporates’ investments are spiraling out of control–as much as $14 billion--even as the corporates say they hope to avoid realizing the losses by holding those securities to maturity. The events of recent weeks, especially after the Treasury Department announced it won’t be propping up the market buy buying distressed mortgage securities, are only increasing the losses. The losses are growing at such a rate that one of the options being explored by NCUA is the unprecedented step of conservatorship of the corporate network.
U.S. Central FCU, for example, recently reported unrealized losses on its investments soared by $1.2 billion in October, even before the Treasury’s announcement, to $7.3 billion, while a handful of other corporates have also seen their losses surge past $1 billion. In recent days WesCorp FCU reported $1.7 billion in unrealized losses; Members United Corporate FCU $1.6 billion in losses; Southwest Corporate FCU $1.2 billion in unrealized losses.
Other corporates are also reporting growing losses on their holdings: Corporate One FCU reported $300 million on held-for-sale securities at the end of October; Constitution Corporate FCU reported $230 million at the end of September; Southeast Corporate FCU $136 million and SunCorp FCU $100 million.
At the same time, all of the corporates are seeing significant withdrawals of deposits, as many of their natural person credit unions members are in need of funds or are unsure of the prospects for their corporate.
Under NCUA’s plan, the CLF would provide longer-term loans to the corporates at favorable rates. This will enable them to hold most of their underwater holdings to maturity or until market conditions help them recover some of the value of the securities. All of the corporates have alternative liquidity sources they have tapped in recent months, but some of those sources are close to exhaustion. U.S. Central, for example, has used up almost all of its $5 billion line of credit with the Federal Home Loan Bank of Topeka and has only $175,000 of unused capacity left.
NCUA, which has been largely ignored by the Treasury as it tries to deal with much larger bank failures, has made the CLF the center of its efforts to help needy credit unions and convinced Congress to increase the amount of funds available through the CLF to $40.5 billion. Since then, almost 100 natural person credit unions have tapped into the CLF for some $2 billion of low-rate loans. More recently, NCUA announced it is offering additional CLF loans to credit unions to help credit unions to refinance thousands of members’ mortgages.
The CLF has a highly unusual structure. It was created in 1979 as a government sponsored enterprise, so is owned by both the private sector, the corporates, but administered by NCUA. Until recently it was rarely used, as the corporates had adequate funds available to provide any short-term liquidity to their credit union members.
Under the NCUA plan for the corporates, U.S. Central, which owns the vast majority of stock in the CLF, would borrow as much as $10 billion from the CLF and the corporate members of U.S. Central would deposit another $450 million of paid-in-capital to U.S. Central.
Some corporates are balking at the capital call, but NCUA officials are insisting for the plan to work everyone in the credit union movement is going to have to agree to make some sacrifices. That means corporates are going to have to sacrifice to help U.S. Central, and natural person credit unions are going to have to make some sacrifices to help their corporates. An NCUA official noted the plan comes at a time when credit unions are holding more than 11% capital, a historically high level.
