$80 Billion Credit Contraction Due to Investment Losses in Corporate CUs

A recently published working paper by the Federal Reserve found that the $7 billion in corporate credit union losses passed onto natural person credit unions may have resulted in an $80 billion contraction in loans from natural person credit unions (NPCUs).

The paper looks at the impact of the collapse in the asset backed securities (ABA) market in 2007 - 2009 on NPCUs through their capital investments in corporate credit unions and uncovered a strong contagion effect.

Although NPCUs held very little in ABS paper, they were indirectly exposed to this market through their relationship with corporate credit unions that invested heavily in the ABS market. As losses on ABS paper on the books of the corporate credit unions mounted, this impaired the capital investments of NPCUs. This depletion in natural person credit unions' capital investments in their corporate credit unions was associated with a significant contraction in lending over the subsequent four quarters.

The paper also found that as corporate credit unions became insolvent, there was an incentive for NPCUs to hoard cash. This is not surprising, given that corporate credit unions were a source of liquidity for NPCUs.

In addition, the paper found that nearly all of the contraction in credit occurred at those NPCUs that entered the crisis with relatively less capital after controlling for pre-existing liquidity as well as size.

Using HMDA data, the research concluded that this contraction in credit availability was disproportionately aimed at that those applicants seeking the most leveraged mortgages.

Read the paper.