Information from NCUA on the Financial Crisis
PRESERVING CONFIDENCE IN CREDIT UNIONS
At the regional conference in Dallas, the theme was preserving confidence in credit unions. You are an important piece in the Agency’s efforts to maintain member confidence in credit unions. As such, you may find yourself being asked questions by credit union management and staff on some of the broader issues facing the industry. Listed below are FAQs that may assist you in answering questions posed to you.
Why is the Agency providing these FAQs at this point in time?
The events that swept through the markets over the past week have altered the financial landscape. By week's end, discussions were afoot in Washington to forge a more comprehensive solution to the mortgage loan problem that is stressing the balance sheets of financial institutions. The details will not be known for a few days, but it appears that a Resolution Trust Corporation (RTC)-type agency, as legislated by the proposed Troubled Asset Relief Act (TARA) will be set up to take distressed mortgages and mortgage backed securities off the books of financial institutions, with a dual purpose of providing a life-support for troubled lenders and help struggling homeowners avoid foreclosures. Washington is also backstopping certain money market funds, making sure that shareholders receive every penny of their dollars invested, much as they would with deposits at banks and credit unions.
Why did the Federal Reserve Bank (FRB) decide to keep rates unchanged last week?
The FRB's decision to keep rates unchanged probably reflects an emerging consensus that the malaise afflicting the economy is not the cost of credit but the availability, or lack of it, that is imposing the biggest stranglehold on growth. With financial institutions coping with steep capital erosion caused by the persistent decline in mortgage-related assets, they are in a much weaker position to extend loans.
How will the real estate market downturn affect credit union confidence from a member’s perspective?
The financial condition of credit unions is impacted in a several ways by the real estate market downturn. The primary impact is from the mortgage loans credit unions made to their members. As the market value declines, the loan to value ratio increases which then increases the risk of loss in the mortgage. If a member defaults on the mortgage, the declining value creates a larger loss to the credit union. The secondary impact is the market value of securities that are backed by mortgages. If questions arise in the mind of investors on the probability that the value of mortgages underlying the security remain stable, the market value of the security declines. As the market value declines, the credit union has unrealized losses on its books. If they are holding the security as Available for Sale, unrealized losses are reflected on the balance sheet. If they are holding the security at Hold to Maturity, any gains or losses are realized at time of sale. While natural person credit unions are faced with both impacts, corporate credit unions are only faced with the second impact.
What happens if a credit union has insufficient liquidity?
Liquidity is one of the major staples of member confidence. If a run were to occur at a credit union, the ability to provide the cash requested is one of the few things that will stop the run and return confidence to the members. Natural person credit unions obtain liquidity from a variety of sources: cash and short term investments, internal operations, slowing lending functions, lines of credit with corporates or other institutions, and sale of investments. When faced with unmet liquidity needs, a natural person credit union can also obtain loans from the Central Liquidity Facility. NCUA is currently working with the Administration to improve credit unions’ access to liquidity through the CLF. Corporate credit unions can also access liquidity through cash and short term investments, asset sales, and borrowings. However, such access is currently constrained due to the larger market dislocations which have prompted the Treasury’s proposal.
Should natural person credit unions continue to invest in corporate credit unions?
Currently, the corporates have approximately $85 billion in securities with $7.3 billion in unrealized losses in their asset backed investments. The investments are paying down at about $1 billion per month. The Office of Corporate Credit Unions looks at each of the 4,141 CUSIPs quarterly. At the last quarterly review, all but 22 for $142 million were performing as contracted. In other words, 99.5% of the number and 99.84% of the dollars are performing as agreed.
Is the NCUSIF strong enough to deal with the financial market stress and protect the deposits of credit union members?
NCUA has been emphasizing the security of federal insurance protection. In July, NCUA issued a media release confirming the secure position of the National Credit Union Share Insurance Fund (NCUSIF), and at the July NCUA Board meeting NCUA’s chief financial officer announced that the NCUSIF has a record reserve level. The NCUSIF, which protects members against loss should a federally insured credit union fail, has an equity level of 1.24 percent and is expected to end the year at 1.28 percent. No member has ever lost a penny of federally insured funds held in a credit union. NCUA encourages credit unions to help educate their members about insurance protection and how members can structure their accounts to maximize share insurance coverage. The agency offers resources online to help educate members at http://www.ncua.gov/ShareInsurance/index.htm.
Member deposits in federal and most state-chartered credit unions are federally insured by the NCUA, through the NCUSIF.
The NCUSIF is backed by the full-faith and credit of the United States government. Consumers who have federally insured
funds in credit unions should rest assured their deposits are safe up to at least $100,000 per consumer and often in greater
amounts depending on the account’s structure. In addition, coverage of up to $250,000 for certain retirement accounts is
also available. As an example, for a family of four the insurance can be significantly greater as shown below:
