WASHINGTON — NCUA was already planning last week to stretch out the costs of the corporate credit union bailout after Congress passed legislation giving the federal regulator vast new powers.
The bill, voted swiftly by the House and Senate and immediately signed into law by President Obama, will create a Corporate CU Stabilization Fund, allow NCUA to stretch out payments to fund the $6-billion corporate bailout, and provide $30 billion in emergency funding for NCUA to stem a systemic crisis.
"While no single element of the reforms...will be sufficient, in itself, to deal with existing problems in the corporate system, taken together we are confident they will succeed," NCUA Chairman Michael Fryzel told members of Congress during a hearing on the bill last week.
The legislation is in response to the meltdown of the corporate system, including the failures of U.S. Central FCU and WesCorp FCU, due mainly to their loading up on mortgage-backed securities. By the time NCUA took the two under conservatorship on March 20, U.S. Central had more than a third of its investments tied up in MBS and WesCorp a staggering 79%. At least half a dozen other corporates are facing similar problems.
The bill gives NCUA a variety of new tools to ease the impact of the corporate bailout on natural person CUs, which have been weighed down by additional charges for their share of the costs, even as they struggle to stay afloat among the economy's decline. It will allow NCUA, for example, to move the entire costs of the bailout from the National CU Share Insurance Fund to the new Stabilization Fund, which will give credit unions seven years to repay the costs. Or it will allow NCUA to spread out the current one-time cost of the bailout through the NCUSIF for as many as eight years. Or NCUA could choose a combination of both remedies.
NAFCU urged NCUA to act immediately to relieve the burden on CUs that took some or all of the bailout costs in the first quarter, by allowing them to redo their financial statements and reverse some or all of the charges. This would "prevent unnecessary confusion and possible apprehension regarding credit unions due to the mostly substandard financial information contained in the call reports that result from the assessments under the current regulatory regime," said NAFCU President Fred Becker in a letter to all three NCUA Board members.
The bailout bill was part of a larger legislative package that also included provisions fund the banking bailout, including power by the FDIC to borrow up to $500 billion to resolve growing bank failures, and several provisions furthering efforts to mitigate foreclosures. It will also extend for four years the increase in federal deposit insurance to $250,000 per account.
The new Corporate CU Stabilization Plan would be capitalized by up to $6 billion in loans from the Treasury's Federal Financing Bank, which would be repaid, just like payments form the NCUSIF, by assessments on natural person credit unions. But the legislation gives the new fund a seven-year life, meaning the repayment of the loans could be stretched over that period. After that, the loans are repaid the fund will be combined with the NCUSIF.
NCUA, which has estimated losses of $5.9 billion for U.S. Central and WesCorp, plans to use the new fund to pay for those losses.Losses on other corporates that exceed their capital would be paid through the NCUSIF.
