Consumer credit unions in Massachusetts are being punished for the poor judgment of a few corporate credit unions outside the commonwealth.
Unlike consumer credit unions, corporate credit unions serve other credit unions, providing investment and banking services, including check processing and clearing and electronic transactions.
In the mid-2000s, some of the 27 corporate credit unions nationwide invested in the risky, mortgage-based securities that triggered the financial crisis.
Over the past two years, the National Credit Union Administration, which oversees federally-insured credit unions, seized control of five failed corporates, in California, Connecticut, Illinois, Kansas and Texas.
Losses at the failed corporates are estimated between $13.9 billion and $16.1 billion. The entire cost will be borne solely by the credit union system, according to the NCUA.
Credit unions that contributed capital to the failed corporates are being assessed first-round costs of $5.6 billion. Losses above $5.6 billion – estimated between $8.3 billion and $10 billion – will be borne by all federally insured credit unions over the next decade.
Consumer credit unions have already paid $1.3 billion in assessments for corporate credit union losses.
They’re also being hit with a 12 percent budget hike this year from the NCUA, a non-governmental agency which receives almost all its funding from credit unions.
NCUA Chair Deborah Matz claims the $25.4-million increase is needed to hire more examiners to increase scrutiny of credit unions’ books and comply with new banking regulations.
But the $225.4 million budget, which was approved in November, also contains $1.2 million in headquarters renovations to fix plumbing problems and make other improvements.
Matz earlier this month announced that NCUA will adopt the federal pay freeze proposed by President Barack Obama. But the freeze won’t apply to the majority of NCUA employees, 80 percent of whom are covered by a collective bargaining agreement that includes a 6.1 percent pay raise.
It’s unclear what effect the additional costs due to the assessments and NCUA’s budget hike will have on consumer credit unions.
But in a recent letter to Matz, Fred Becker, president of the National Association of Federal Credit Unions, pointed to the still-fragile economy and the fact that credit unions have not been able to reach a 1 percent return on average assets ratio for several years.
Both Becker and Credit Union National Association President Bill Cheney have asked Matz to allow credit unions to prepay their assesments to avoid negative accounting treatment. Becker also suggested NCUA consider borrowing additional money from the Treasury outside the stabilization authority.
While the stabilization fund’s borrowing authority is capped at $6 billion, “current economic factors clearly justify such additional borrowings,” he said.
President Obama earlier this month approved a measure requiring the Government Accountability Office to study NCUA management of the corporate credit unions and their financial crisis.
The GAO study will evaluate NCUA’s reactions to those failures and review the ability of insured credit unions to pay the potential $16.1 billion in assessments and determine whether there is any risk to taxpayers.
A GAO investigation would be a welcome measure to ensure that the financial missteps of a few large corporate credit unions don’t hobble the continued growth of Massachusetts’ credit unions.
Meanwhile, Matz should carefully consider any reasonable measures to ease the impact of assessments and NCUA’s budget increase on credit unions’ bottom lines.
