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Credit Union news

Non-Agency MBS Killed Corporate Credit Unions

Government report reviews credit union failures

Jan. 5, 2012

By staff

The costly failure of five corporate credit unions can be attributed to their investments in non-agency mortgage-backed securities, according to the congressional watchdog agency. Another issue identified was the slowness with which regulatory actions were taken against the institutions.

From Jan. 1, 2008, through June 30, 2011, there were 90 credit unions that failed, according to a new government report. Of those, five were corporate credit unions that provided wholesale financial services to other credit unions.

The report was released Wednesday by the Government Accountability Office.

The five wholesale institutions accounted for 75 percent of assets at all corporate credit unions, whereas the other 85 financial institutions held less than 1 percent of all credit union assets.

The corporate credit unions failed because of poor investment and business strategies, according to the report.

"Specifically, the failed corporates over concentrated their investments in private-label, mortgage-backed securities and invested substantially more in private-label MBS than corporates that did not fail," the GAO stated.

The 85 smaller credit unions failed because of poor management, the report found.

The GAO indicated that a report from the inspector general of the National Credit Union Administration, which is the federal regulator of the credit unions, found that the NCUA didn't move quickly enough in its examination and enforcement processes to take actions that would have avoided the failure of the credit unions.

"To address weaknesses highlighted by the crisis, in 2010, NCUA issued regulations to prohibit investment in private-label MBS, established a PCA framework for corporates, and introduced new governance provisions," the report said. "NCUA considered credit unions' ability to repay borrowings from Treasury and included measures to reduce moral hazard, minimize the cost of resolving the corporates, and protect taxpayers."

The GAO report recommends that the NCUA provide its inspector general with the documentation needed to accurately estimate potential losses.

In addition, it was recommended that additional triggers be established for prompt corrective actions to require early and forceful regulatory action and make recommendations to Congress on how to modify the orders.

The NCUA issued a statement indicating that it supports both of the GAO's recommendations, and it is already working on implementing them

"With completion of the 2010 Corporate Stabilization Fund audit last week, NCUA has complied with the first GAO recommendation and will continue to regularly update cost estimates in the future," NCUA Chairman Debbie Matz said in the statement. "To fulfill GAO's second recommendation, we will continue to implement strategies to improve NCUA's early detection methods and strengthen enforcement actions where necessary."

Matz did note, however, that the NCUA has been stepping up supervisory and enforcement actions since the beginning of the financial crisis -- in some cases preventing the failure of more credit unions.

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