Matz on Corporate Credit Unions

On Wednesday, October 14th, NCUA Chairman Deborah Matz testified before the Senate Banking, Housing and Urban Affairs Subcommittee on Financial Institutions on the state of the credit union industry. Below are excerpts from Chairman Matz’s testimony on corporate credit unions.

The downturn in the residential mortgage-backed securities market had a devastating impact on the twenty-eight corporate credit unions ... While the majority of the investments were AAA or AA rated, even highly rated securities were not immune to the market contagion. In 2005 and 2006, significant levels of non-agency residential mortgage-backed positions in the ALT-A sector, with mezzanine ALT-A tranches, were added to the portfolios of the two largest corporate credit unions – Western Corporate Federal Credit Union (WesCorp) and U.S. Central Federal Credit Union (U.S. Central). The subsequent market downturn which began in 2007 forced both WesCorp and U.S. Central to reflect significant losses when performing a valuation of their investment portfolios.

The impact of the losses at U.S. Central reverberated through the rest of the corporate credit unions ... As the losses at U.S. Central exceeded retained earnings, the paid-in capital and membership capital accounts held by the retail corporates were depleted to absorb the losses ... The losses flowed through to natural person credit unions. Where losses exceeded retained earnings at the retail corporate credit union, than the paid-in capital and membership capital accounts invested by natural person credit unions were depleted.

NCUA is in the process of drafting significant revisions to its corporate credit union rule ... It is NCUA’s goal to issue the proposed rule for comment in November 2009 and have in place a new regulatory framework for the corporate credit union system by mid-2010 ... WesCorp and U.S. Central are preparing to utilize external sources of funding through offering issuances guaranteed by the NCUSIF for terms of two to three years. This action will provide liquidity within the credit union system during the regulatory transition period, and enable NCUA to consider alternatives in the disposition of the distressed assets on the corporate credit union balance sheets.