Some Credit Unions to start 'disappearing' in 2011
(snip)Last week saw a flurry of activity relating the nations credit unions. I’m not sure what it adds up to, but it is curious. For example, Congress passed a law on the subject:
111TH CONGRESS 2D SESSION S. 4036
AN ACT To clarify the National Credit Union Administration authority to make stabilization fund expenditures without borrowing from the Treasury.
Just the heading of this scares guys like me. The purpose of the law is to avoid Treasury from forking out money to the NCUA? That would be a bailout. Everyone hates bailouts. But there is a large hole in the NCUA system that should be filled. If that bucket is not filled by Treasury then who will fill it?
I believe the plan for the empty bucket is to assess the individual credit unions for several years worth of insurance premiums. This is exactly what NCUA’s big sister, the FDIC, did last summer. The FDIC collected four years of premiums upfront to bolster their underwater insurance fund. In the case of banks, the prepayment shows up as an asset on the books, the expense is recognized over the four years, so there is no economic penalty for the banks to front the losses. The question then becomes, can the individual credit unions pay the premiums? That was addressed in the new law:
Any insured credit union that fails to make timely payment of the assessment or special premium is subject to the procedures and penalties described under 21 subsections (d), (e), and (f) of section 202.’’
Basically this means if they don’t/can’t pay, they are toast.
How big is this issue? Consider the following:
As of November month end, 372 federally insured credit unions, with assets of $43.4 billion were designated as CAMEL code 4 or 5. In addition, there were 1,792 CAMEL 3 credit unions with assets of $158.2. Overall, 22.3 percent of all credit union assets are in CAMEL code 3, 4 or 5 credit unions.
What does CAMEL 4-5 mean? Answer: Dreck. (snip)
(snip)There are of course losses embedded in this $200b of assets. How much? I would estimate $20-40b. That may sound like a big number, but it is not. There are about $900b of total assets in CUs so the problems are in the 5% range. They are also concentrated in a few large corporate CUs. Four-years of prepaid insurance covers the nut. The question becomes; “Who is going to step in to fill the roll of those that are in the process of failure?”
The answer to that (I think) lies in the minutes of a board meeting by the National Credit Union Administration. The meeting took place on December 16th. The exact same day that Congress was voting to approve S.4036. (If you believe in coincidences, stop reading) The language:
New subpart C of Part 708a establishes procedural and substantive requirements for converting a credit union to a bank through merger.
They change the rules so that the commercial banks can play in this space? This change to the charter is also interesting:
The new requirements apply to direct mergers as well as transactions where the credit union first converts to a mutual savings bank (MSB) and then merges with another bank without operating as a stand-alone MSB.
This suggests that a CU can become a MSB in the morning, and in the afternoon it can merge or sell itself to a commercial bank. What do they need to get all of this done? SECRECY, of course. From the NCUA 12/16 minutes:
Finally, the proposed amendments to Parts 708a and 708b revise existing rules to enhance the secrecy and integrity of the voting process in MSB and insurance conversions.
Given that this can now be accomplished with the desired level of secrecy I would anticipate that the process will commence sometime in 2011. I anticipate that some of the big banks will step in and buy up the shells of a number of the corporate CUs.
Should this happen many will call it a success. The alternative was a federal bailout that would have cost taxpayer dollars. This outcome is the objective of S.4036. But here is my rub; the CUs provide important banking services to millions of people. Were it not for the legacy assets of 2006-08 the CU’s would be muddling along just fine today. They provide an important alternative to the big commercial banks. But now some key players who provide important services to the smaller CUs are going to get gobbled up by fat cat bankers from Wall Street.
There is big money to be made in this consolidation. Big players will no doubt be involved. At the end of the day the big banks will make another bundle. The cost, over time, from less competition and higher fees to consumers will be more than the $30b that is being avoided.
This is another of those examples where if you are big and have muscle you can bend the outcome and come out ahead. Guess who brought you S.4036? Dodd/Frank of course (surprised? I hope not). These two guys have been the best friends the big banks ever had."(snip)
from
Trying to decipher the above as to what it might mean for exotic dancers who use Credit Unions ...
- To avoid having to rely on new US taxpayer bailout money to prevent NCUA deposit insurance from defaulting on future bankrupt Credit Unions, the NCUA intends to assess 4 years worth of NCUA insurance premiums all at once next year to replenish the now depleted NCUA deposit insurance fund.
- However, the magnitude of this increased insurance premium assessment will exceed the total annual profits of the majority of credit unions. In the best case, being able to pay this increased insurance premium will mean a drop in interest rates paid to credit union depositors and an increase in interest rates charged to credit union borrowers. In the worst case, some credit unions will simply not be able to come up with the additional money required to make these increased insurance premiums
- In the latter case, under these just passed new laws and regulations, a 'nearly broke' credit union which cannot come up with the 'cash' to pay 4 years worth of NCUA insurance premiums all at once will have two choices. The first is to be 'put out of business' by the NCUA. The second is to convert from being a credit union to a bank ... so that the credit union's customers and accounts can be taken over by some major (inter)national bank with money to spend on 'acquisitions'. As the article states, specific provisions have been enacted that would allow this conversion and purchase to take place within a single day !!!
- This is basically a replay of the mechanism by which Wells Fargo took over Countrywide, but with the obvious exception that Wells Fargo's lending / customer policies will arguably be far LESS accomodating than existing credit union lending / customer policies. As 'nearly broke' credit unions are taken over next year, it is a virtual certainty that the income verification, credit score, paycheck stability etc. criteria used by the large (inter)national purchasing bank will immediately take the place of the ( typically more flexible ) criteria presently used by the credit unions.
- Additionally, even if certain 'local' credit unions are extremely solvent and secure and can afford to make the huge NCUA insurance premium payment, these 'local' credit unions are dependent on the ( very troubled ) Corporate Credit Unions for services such as mortgage loan resale, for electronic funds transaction capability, for check clearing etc. Thus if these Corporate Credit Unions are bought out by the likes of Wells Fargo, even the still independent 'local' credit unions may be forced to follow Wells Fargo's lending / customer policies in order to continue to access these necessary services. Of course the 'local' credit unions could choose to independently implement these services, but the much higher unit costs involved to process such functions for say 10,000 customers versus 10,000,000 customers would probably render these 'local' credit unions insolvent !
If there is a 'bottom line', it is probably this. By one means or another, during 2011 the 'cash friendly' deposit policies of credit unions, the 'income verification friendly' loan policies of credit unions, and the 'better' deposit and loan interest rates available from credit unions, are likely to start disappearing even if the credit union itself doesn't 'disappear' via a Wells Fargo bank branch conversion !
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Re: Some Credit Unions to start 'disappearing' in 2011
IMO Credit unions should have long ago fell under the same umbrella as banks, they are now and have been for years "banks" in everything but name.
They are no longer these little local instituions that possibly once valid reasons for having rules of their own that were different from the ones banks operated under.
Many operate with physical branches coast to coast or in some case to some degree wordwide, my credit union has more than one branch in the UK. Navy Federal which I was a member of truly has branches word wide more than many US based "banks" and in these days of most employers all but requiring "direct deposit" and world wide online banking having actual branches is not even required anymore.
You can live in Northern Michigan or Northern Alaska and still use the credit union you joined for Los Angeles county employees back when you were a life guard one summer in the 70's or you just were going to UCLA in the 90's
Back when they were small instituions had had nothing but saving accounts and their memberships were limited to a specific normally small group IE to open an account at Navy Federal you had to be in the Navy or at very least work on a Navy Base or some how for the Navy. Now 99.9% of credit unions provide every service that a bank does, checking accounts, credit cards, mortgage loans, IRA's and other "investment vehicles" and for the best part of the last 20 years have been more than willing to open an account for anyone who walked though the door with 5 or 10 bucks. There is one where I live that advertises "if you live, work, worship, attend school in ------ County, this leaves out practically no one and besides if you claim to go to x church would anyone ever really check?
So IMO the banks have every right to say that if credit unions want to operate as banks then they should be required to meet all the same standards and regulations that banks do.
Re: Some Credit Unions to start 'disappearing' in 2011
^^^ agreed that the concept of 'local' credit unions died right along with 'local' Savings and Loan companies ... and for the same reason. Being 'local' means a high risk exposure to changes in 'local' employment levels, real estate valuation levels, average income levels etc.
However, despite the fact that ( by choice or by regulation ) credit unions widened their coverage areas, in many cases they still kept their former 'local' standards for customer relations. This was particularly valuable to dancers, because credit unions would often avoid the sneers upon making large cash deposits, would often avoid the difficult questions when applying for loans etc. that major banks typically put forward. As credit unions are 'absorbed' by the major bank culture, these 'local' standards for customer relations are likely to be a casualty !
Re: Some Credit Unions to start 'disappearing' in 2011
SLAM! Sound of Sam running to the credit union to close her account
Re: Some Credit Unions to start 'disappearing' in 2011
^^^ well so far, in the US at least, when banks and credit unions have failed, the FDIC and NCUA insurers have been able to 'borrow' enough money from the US Treasury to immediately pay off the insured account depositors. I say 'borrowed' since the total amount of FDIC and NCUA insured account payouts already exceeded the amount of money that credit unions and banks had paid into these insurance programs.
However, it remains to be seen whether this 'blank check' from the US Treasury ( i.e. US congress ) will continue regarding future failures, versus whether the insured depositors will soon be required to wait months or years for their money to be 'paid out' via future collections of FDIC and NCUA insurance premiums from 'healthy' banks and credit unions. This is what's driving the huge increases in insurance premiums now being charged, and also what's contributing to the increased difficulty of certain banks and credit unions to operate profitably. Under current law, insured depositors may need to wait up to 5 years before receiving their insurance payouts ( without additional FDIC / NCUA payments for interest ). If the s#@T hits the fan and this scenario actually develops, then yes it will become a 'race' to see how many depositors are able to withdraw their money before the NCUA shuts the doors on their local credit union !
Actually, the low profile maneuverings to convert credit unions into banks is a 'back door' remedy to this potential situation, since it would allow large healthy banks to buy out the assets of troubled credit unions at bargain prices without involving an official failure or insurance payouts !!!