Monday, September 26, 2011

Net Worth Assistance Coming to Troubled Credit Unions

The NCUA Board approved net worth assistance for credit unions that are in danger of failing.

Section 208 of the Federal Credit Union Act allows the Board, in its discretion, to make loans to, or purchase the assets of, or establish accounts in insured credit unions the Board has determined are in danger of closing or in order to assist in the voluntary liquidation of a solvent credit union.

ABA believed that this assistance should only be provided in the case of a merger of a failing credit union into a healthy credit union. It was not meant to be used as a vehicle to prop up credit unions that are in danger of failing.

According to NCUA Chairman Matz's December 2010 testimony, she pointed out that when a healthy credit union acquires a failing credit union, this resoluted in a delusion of the healthy credit union's net worth. Without the ability of counting assistance from NCUA as net worth, this "necessitates more outright liquidations instead of mergers," which would increase the resolution cost.

However, NCUA disagreed with ABA's viewpoint. NCUA wrote that there was no language limiting section 208 assistance to situations only involving a merger. Therefore, section 208 assistance can be provided directly to a troubled credit union and be counted as part of a credit union’s net worth.

Furthermore, NCUA stated that it would not disclose the name of credit unions receiving section 208 assistance and will not include a line item regarding section 208 assistance in the 5300 Call Report.

NCUA wrote that if it made public information about credit unions receiving section 208 assistance, there was a strong possibility that members may perceive the credit union as weak and unstable. Let me make one thing clear -- if a credit union is getting section 208 assistance, it is because it is weak and unstable.

Perhaps, the news media will mount a legal challenge to NCUA's decision to not disclose which credit unions receive section 208 assistance.
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