NCUA Warns Of ‘Too Big To Fail’ Risk In Corporate Restructuring

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ALEXANDRIA, Va. – NCUA on Tuesday cautioned credit unions who are working to reconstitute the corporate credit union network that putting too many resources in any one entity could pose an unacceptable “too big to fail” risk to the credit union system, just as the one at U.S. Central FCU.

Noting the agency’s ongoing attempts to resolve the five big corporates, Scott Hunt, director of NCUA’s office of corporate credit unions, warned that any restructuring plan should not count on a federal bailout. “Future agency action to provide such systemic support cannot be factored into contingency plans,” wrote Hunt in a new letter to credit unions issued yesterday.

The letter, titled “Large Consolidation Issues,” notes how many credit union leaders are considering a major consolidation of the corporate system, while others are discussing the creation of a nationwide CUSO to perform payments functions. NCUA said both plans would concentrate resources. “However, the concentration of services or the aggregation of service volumes in one entity large enough to introduce systemic risk may create an unacceptable ‘too big to fail’ scenario,” said the letter.

The warning evoked the failure of U.S. Central FCU, whose national payment services were so essential for credit unions that NCUA was forced to step in and operate the one-time $52 billion corporate. The letter poses two too big to fail scenarios: the nationwide interruption of services, and the potential failure of a critical institution, such as U.S. Central.

“In either case,” wrote Hunt, “without an adequate contingency plan, the larger number of credit unions seeking an alternative a new service provider in a very short period of time could overwhelm the capabilities of alternative service providers and result in service disruptions.”

Future NCUA action to provide a systemic backstop cannot be relied on, he said.

 

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