CU Exposure to State and Local Government Debt

The Great Recession and subsequent sub-par recovery has significantly stressed the finances of state and local governments. This has increased the probability that some municipalities may default on their obligations and bondholders will experience losses on these investments.

For example, Nouriel Roubini's consulting firm has estimated that about $100 billion of state and local debt will default over the next five years, with about $20 billion in actual losses.

Recently, the Office of the Comptroller of the Currency has begun asking bank risk management officers to evaluate the potential for defaults and losses on their municipal bonds. Additionally, examiners are looking for insight into interest-rate risks banks could face from their municipal bond portfolios.

The following analysis looks at credit union exposure to state and local government debt.

As of March 31, 2011, there were 106 credit unions that reported holding state and local government bonds. While few credit union reported holding state and local debt, these institutions are significantly larger than the average credit union (asset size of $735 million versus an industry average of almost $130 million).

While the risk from local government debt to the National Credit Union Share Insurance Fund appears to be minimal at this time, there are some credit unions that have significant exposure to state and local government debt. Seven credit unions report that their exposures to state and local governments exceed their net worth, including to $4 billion-plus credit unions (Bethpage and Alaska USA).

The following table lists the 25 credit unions with the greatest exposure to state and local government debt as a percent of the credit union's net worth (click on image to enlarge).