Wednesday, May 14, 2014

Too Interconnected to Fail

Credit unions have had a history of being too interconnected to fail.

Whenever a corporate credit union got into financial trouble, NCUA has stepped in to bailout credit unions.

In January 1995, Capital Corporate Federal Credit Union (CapCorp) failed because of a sharp rise in interest rates in 1994. To prevent a run on CapCorp and a fire sale liquidation of CapCorp's assets, which would have magnified CapCorp's losses, NCUA guaranteed the $700 million of uninsured deposits for 483 credit unions that were members of CapCorp.

According to a 1995 study on CapCorp's failure, the Government Accountability Office wrote:

"Up to $70 million of Cap Carp's losses, originally projected to be $100 million, would be borne by its member credit unions through the loss of Cap Corp's total capital-- approximately $33 million in retained earnings and $37 million in MCSDs held by its members. NCUA's analysis indicated that these losses could be absorbed by the member credit unions without causing any of them to fail. The losses to the member credit unions could have been even larger if NCUA had decided not to cover the approximately $700 million in uninsured member deposits because, in the absence of this support, a run on Cap Corp could have forced the sale of assets at lower than expected prices." (emphasis added)

Fast forward to 2008 and 2009, once again the credit union industry teetered on the abyss as five corporate credit unions failed. The interconnectedness between corporate credit unions and natural person credit unions caused NCUA to take decisive action to stabilize the industry.

As NCUA Chairman Debbie Matz stated in a 2010 speech,

"[a]bout 90 percent of natural-person credit unions had investments in corporates. If the corporate system had collapsed, natural-person credit unions would have suffered huge and insurmountable losses – shattering confidence in all of America’s credit unions. Natural-person credit unions would have lost about $30 billion in net worth – about one-third of their net worth at the time. At least 800 natural-person credit unions would have collapsed.

On top of all that, your federal Share Insurance Fund would have had to levy huge assessments on the surviving credit unions, to cover the remainder of the losses. Many of those remaining credit unions might not have withstood the strain."

Debbie Matz further stated:

"To stabilize the system, NCUA placed guarantees on shares at all corporates. As a result, credit union investments in the corporates are backed by the full faith and credit of the United States government." (emphasis added)

While NCUA has put in place more stringent regulations with regard to corporate credit unions, natural person credit unions and corporate credit unions still remain too interconnected.

It is only a matter of time before a corporate credit union gets into financial trouble and NCUA will guarantee all uninsured deposits of a corporate credit union's members to prevent a run.


  1. Keith,
    It is the inter-connectidness that is the strength of our system. No taxpayer money has been lost and our insurance fund never dropped below 1.2% of insured assets. Can you say the same for the FDIC?

  2. If it was not for the creation of the Temporary Corporate CU Stabilization Fund, the NCUSIF would have been at 0.31 percent in 2009.

    1. Which still was still better than the equity ratio on BIF at the same time...without "unusual support from the Treasury."

    2. Keith.
      Didn't FDIC return $6B of the bank's funds?
      Have credit unions gotten any assessments back?
      As a percentage of industry assets, how much assets are in troubled banks today and how much in troubled credit unions (including corporate assets that failed)?

  3. This blog post and the first anonymous post speaks volumes about the Congress' abdication of responsibility in their role of (not) supervising NCUA.
    NCUA has gotten away with ignoring repeated warnings about their prudential supervision.
    Credit Unions remain clueless as to the FACTS behind all this and more.
    As you state, without unusual support from the Treasury, the run would have been calamitous...yet avoidable had Congress held NCUA accountable to multiple warnings.
    Today, it's worse for possible calamity, not better.
    As a volunteer at a large CU, I've been shocked, apalled and embarrassed at the NCUA behavior regarding many things.



The content is provided for educational purposes only, with the understanding that neither the authors, contributors, nor the publishers of this site are engaged in rendering legal, accounting or other expert or professional services. If legal or other expert assistance is required, the services of a competent professional should be sought.

Comments appearing in response to articles appearing on this site do not necessarily reflect the views of the ABA. ABA makes no representations regarding the truth or accuracy of commentary or opinions that may be posted in response to the articles that appear on this website.

The inclusion herein of any link to a website, either in the text of an article or in a comment, does not denote any approval, sponsorship, or endorsement by the ABA, and ABA is not responsible for the content or opinions expressed on those linked websites or related commentary. This content is not licensed to third parties sites and is not affiliated with any third party site. Any reference to the author or this content on any third party site on the Internet is not authorized by the ABA.

It is the policy of the American Bankers Association to comply fully with all antitrust laws. Certain discussions should be considered off-limits, including those that contain competitively sensitive data such as price and cost information, or statements that could be construed as reflecting an attempt or desire to control or influence a particular market or markets. Future pricing or other prospective competitive information should never be shared.