Three-Tier CU System Collapsing From The Top

Credit Union Journal | Tuesday, March 24, 2009

LENEXA, Kan. – Billions of dollars of losses from this weekend’s takeover of U.S. Central FCU and WesCorp FCU will cascade on down through the three-tiers of the credit union system: from U.S. Central at the top, to its 26 corporate members; and down to the 8,100 regular credit unions, known as natural person credit unions, which will be forced to take it out of their own members.

NCUA confirmed yesterday that the failure of U.S. Central will force U.S. Central’s 26 corporate members to charge-off all of their membership capital shares and paid-in-capital in the corporate credit union for corporate credit unions–a total of $2 billion.

In addition, the 1,022 credit unions that are members of WesCorp will have to charge-off all of the membership capital share accounts and paid-in-capital they held in WesCorp–another $2 billion charge to those credit unions.

The failure of the two corporate giants will not only erase the capital shares and PIC in the two, but cost the National CU Share Insurance Fund at least another $1.2 billion to resolve–a cost that will be spread through all of the nation’s federally insured credit unions.

The cascading losses, according to NCUA officials, will push as many as 247 at-risk credit unions below minimum capital standards forcing an estimated 67 of them towards failure under so-called prompt corrective action rules.

Marquis and other NCUA officials estimated yesterday the cost for the corporate bailout could ultimately rise to as much as $10.8 billion in losses. Under a worse-case scenario, those losses could be as much as $16 billion, he said.

Between the write-down of credit unions’ 1% NCUSIF deposit and the expected premium charge later this year, every federally insured credit union will have to subtract 100 basis points, or 1%, from their net worth to pay the cost. For WesCorp members, who will have to charge-off their WesCorp capital accounts (MCS and PIC) as well, that could amount to as much as 150 bps, or 1.5%, of net worth, according to Marquis.

NCUA officials said credit unions will have to reflect the write-down of their 1% deposit on their 5300 Call Report for the first quarter ending March 31. The eventual premium charge will be assessed in September when the credit unions should report that charge.