NCUA Taps Borrowing Authority for Corporate Stabilization Fund

The credit union industry will no longer be able to claim that their insurance fund has not received taxpayer assistance.

On May 20, 2009, the President signed into law S. 896, Helping Families Save Their Homes Act. The bill created a Temporary Corporate Credit Union Stabilization Fund to pay expenses associated with the ongoing problems in the corporate credit union system instead of having the cost paid by the National Credit Union Share Insurance Fund (NCUSIF). This new Stabilization Fund authorizes the National Credit Union Administration (NCUA) to borrow up to $6 billion from the Treasury on a revolving basis.

As soon as the ink dried on this legislation, the NCUA Board on June 18 exercised its borrowing authority and shifted a portion of the cost of the corporate credit union bailout to this new Stabilization Fund.

NCUA authorized the Stabilization Fund to immediately borrow $1 billion from the Treasury to take assignment of $1 billion Capital Note from NCUSIF. Earlier this year, the NCUA Board approved assistance in the form of a $1 billion Capital Note from the NCUSIF to U.S. Central Federal Credit Union. At the time of this Capital Note placement, the NCUSIF established an allowance for the loss of the entire $1 billion, because it was highly unlikely that the $1 billion note would be recovered. By assigning the note to the Stabilization Fund, the NCUSIF will recognize a recovery of the $1 billion expense and thus increasing the NCUSIF’s equity by $1 billion.

But more borrowing is likely to come. The NCUA Board directed the Executive Director and the Director of the Office of Corporate Credit Unions to take the appropriate steps, with the assistance of the Office of General Counsel, to legally obligate the Stabilization Fund for any liability arising from the Temporary Corporate Credit Union Share Guarantee Program (TCCUSGP). The TCCUSGP guaranteed all shares in corporate credit unions that opted into the program. By making the TCCUSGP an obligation of the Stabilization Fund, this will shift $4.977 billion in reserves set aside for losses from corporate credit unions from the NCUSIF to the Stabilization Fund.

This suggests that total borrowings from Treasury by the Stabilization Fund could soon approach $6 billion and NCUA hinted that it could go even higher under its emergency borrowing authority.

Tax-exempt credit unions are the direct beneficiaries from this new Stabilization Fund, because they will be able to recover the impaired portion of their one percent NCUSIF capitalization deposit with taxpayer assistance.