Information from NCUA on the Financial Crisis
TO: All NCUA Staff
FROM: Executive Director J. Leonard Skiles
SUBJ: Recent Market Events and the Impact on Credit Unions
DATE: September 23, 2008
These are difficult and challenging times for the entire financial service industry. In 2008 alone, we witnessed the failure of Wall Street stalwarts Bear Sterns and Lehman Brothers; the failure of IndyMac; the conservatorship of FNMA and FHLMC; the AIG bailout; and, just this past Friday, the most sweeping proposed government intervention since the great Depression.
Specifically, Treasury Secretary Henry Paulson has proposed a $700 billion plan to purchase mortgage related assets. If enacted into law, the Troubled Asset Relief Act (TARA) would provide Treasury Secretary the authority to purchase and make commitments to purchase mortgage related assets from financial institutions. Through efforts spearheaded by NCUA, TARA specifically includes credit unions. Details are limited and negotiations are underway in Congress to implement some version of Treasury’s plan. From the current information, the Administration and Congress hope to complete negotiations and pass the legislation by the end of this week.
As you know, credit unions are not immune from this economic downturn and the dislocation of the mortgage-related market. For example: over the past year, Cal State 9 Credit Union, Norlarco Credit Union, and Huron River Credit Union failed, causing significant losses to the NCUSIF.
On August 11, the Wall Street Journal brought to light the challenges facing the corporate credit union system with an article entitled “Mortgage-Market Trouble Reaches Big Credit Unions.” This article primarily addressed the impact of current market conditions on fair values of mortgage-related securities held by five corporate credit unions. Since then, the corporate systems’ accumulated unrealized losses on Available for Sale (AFS) Securities, Other Comprehensive Income/Loss, and accounting adjustments increased to $7.3 billion. The unrealized losses on the investments are attributed to unrealistically low market values on otherwise sound investments. Corporate credit unions, by regulation, are limited to the most highly credit-rated investments. In fact, the overwhelming majority of investments continue to cash flow, with over $1 billion in principal and interest payments being received monthly.
However, a critical factor in this current depressed mortgage-related securities market is liquidity. The current market dislocation has placed significant constraints on corporate credit union liquidity. NCUA’s Office of Corporate Credit Unions (OCCU) continues to dedicate its resources to ensure corporate credit unions are managing their balance sheets appropriately during this stressed market.
In recent months, NCUA has taken a series of actions to respond to deteriorating liquidity conditions in corporate credit unions. For example: NCUA has been working with Congress to increase the Central Liquidity Facility’s (CLF) borrowing limit from its current $1.5 billion borrowing cap. This action, coupled with NCUA’s efforts to be specifically included in the TARA legislation would inject much needed liquidity into the credit union system.
In response to the recent market turmoil, the regional and central offices have received numerous federal share insurance questions. We are in the process of developing a member information campaign to clearly communicate the value of federal insurance and federal share insurance provided by the NCUSIF. As you know, the NCUSIF is backed by the full faith and credit of the United States government. Board Member Gigi Hyland is hosting a webinar entitled Share Insurance 101 on October 7, 2008 at 1:00 p.m. (EDT). The presenters will detail the legal and regulatory requirements for federal share insurance, operational issues, and hold a question and answer session. If you are able, please attend this webinar, and make sure you recommend your credit unions attend as well. Registration information is available on NCUA’s website under “Upcoming Events.”
Given the news from this past week, NCUA senior staff met to discuss and assess the potential increase to the CLF lending limit and Treasury’s proposal to purchase mortgage related assets from financial institutions. Staff is working to develop plans for all contingencies facing the credit union system and is working with Congress and the Administration to assure credit unions are included in any final legislation on these issues. NCUA and credit unions have a long history of working together to preserve confidence in the credit union system. Such continued effort is critical as we address today’s challenges.
We anticipate that once Congress has acted and NCUA has finalized new guidelines relating to corporate credit unions, Chairman Fryzel will share relevant information with our nations’ credit unions.
I have attached a Frequently Asked Questions (FAQ) document to assist you in understanding the issues.
