Are any credit unions too big to fail? The answer is paradoxically both "Yes" and "No."
The question itself has become freshly relevant in the context of the U.S. Treasury and Federal Reserve intervention with investment bank Bear Stearns Cos Inc. Earlier in 2008, the Fed brokered a deal for JP Morgan Chase & Co to take over Bear Stearns, which helped remove widespread fears about a potential crippling of the financial system over that investment bank's fall to the brink of bankruptcy. Bear Sterns was too big to fail.
Like the investment banking and commercial banking industries, the credit union industry's assets are concentrated in its largest institutions. At the end of 2007, the 304 federally insured CUs of more than $500-million in assets represented less than 4% of all credit unions, yet held 57% of total assets, and served 45% of total members.
Just the five largest CUs-Navy FCU, State Employees, Pentagon Federal, Boeing Employees, and SchoolsFirst FCU-together held about 10% of total assets.
The concentration risk begs the question-are any of these five largest credit unions too big to fail?
Since the entire U.S. credit union industry is such a small component of the larger financial system, the answer to that question is a somewhat disturbing "No." Should they ever run into trouble, it is highly unlikely that the U.S. Treasury and the Federal Reserve would step in to save any of these large credit unions.
Congress would be reluctant to fund a bailout unless the entire credit union industry was facing a catastrophe. And then only after the industry's own resources have been depleted.
To help keep things in perspective, the five largest commercial banks alone have $5 trillion in assets. That's "trillion" with 12 zeros. At the end of 2007, the FDIC reported commercial bank total assets at $11 trillion.
The nation's more than 8,000 CUs hold about $800 billion in assets. The five largest CUs represent about $80 billion of the total. Compared to commercial banks, when it comes to potential systemic risk, CUs are in the minor leagues.
NCUSIF Would Decide Who Is Too Big To Fail
The challenge of answering the question "Are any credit unions too big to fail?" would ultimately fall to the National Credit Union Share Insurance Fund. Here, perspective is everything. Within the narrower context of the NCUSIF, the nation's largest CUs are, indeed, too big to fail.
Any problems at these large institutions would result in direct costs to the NCUSIF and the credit unions that fund it with their annual 1% deposits. If the NCUSIF has to deal with catastrophic losses, federally insured credit unions would be required to participate in the bailout with additional funding. That in itself could trigger an unpleasant domino effect.
But don't panic. We're only talking hypothetically. Based upon March 2008 financial performance reports, the nation's five largest credit unions are in very respectable condition. Any discussion of "too big to fail" is purely academic at the moment. But as any strategic planner worth his or her salt will tell you, there is great value in asking the tough, worst-case scenario questions well before they might be faced in the real world. Such thinking often leads to strategic epiphanies that can be successfully applied to the likely scenarios.
Credit Union Industry Is Stable, But Stressed
Credit unions as a whole, including those over $1 billion in assets, are experiencing the toughest economic conditions in recent memory. Losses and charge offs are taking their toll at well-capitalized credit unions and are threatening the stability of those that are not.
For this year and possibly the next, credit union economists are predicting faster savings and asset growth, slower loan growth, significant increases in loan delinquencies and losses, substantial downward pressure on net income, and falling net worth ratios. Some believe that noticeable economic improvements won't arrive until the end of 2009.
Reportedly, NCUA is assigning additional examination resources to the most at-risk states. For the credit union industry, engaging in a bit of preemptive "what if" thinking appears quite prudent under these circumstances.
Credit Unions Are Not Too Big To Fail
Although stressed by the poor economy, the credit union industry today is still fundamentally sound. The severity of systemic stress that would turn the "too big to fail" question from a theoretical exercise to the 800 pound gorilla in the room is thankfully absent.
However, collectively as an industry and as individual credit union leaders, it remains strategically prudent to consider the "what ifs" of the worst-case scenario. Due to the interconnectedness of the components of the system, what happens at any credit union affects every other credit union, especially if things go horribly wrong.
In other words, credit unions must be prepared to bailout themselves.
The industry should act now to address its loan losses judiciously and preserve precious capital, thereby ensuring the worst-case scenario isn't allowed to become reality. Perhaps with enough forethought no one will have to actually answer that unsettling question, "Are any credit unions too big to fail?"
Marvin Umholtz is CEO of Umholtz Strategic Planning & Consulting Services, Olympia, Wash. He can be reached at marvin.umholtz
