Corporate Credit Unions Subsidized by Federal Safety Net

By Keith Leggett

During the Financial Crisis, corporate credit unions received a significant subsidy from the Federal safety net, as the financial conditions of corporate credit unions deteriorated.

Five corporate credit unions failed during the financial crisis because of massive losses on their investment portfolios of risky asset-backed securities. In addition, the equity investments of corporate credit unions in U.S. Central, a wholesale corporate credit union serving retail corporate credit unions, were wiped out by losses at U.S. Central.

Concerns about systemic collapse of the credit union system arising from the mounting problems at corporate credit unions caused NCUA in late 2008 and early 2009 to take a number of actions to stabilize the corporate credit union system, including guaranteeing all uninsured deposits at corporate credit unions and borrowing funds from the U.S. Treasury to stabilize and resolve the five failed corporate credit unions.

As a result of NCUA’s actions, in early 2009 Fitch raised the Support Rating and Support Rating Floor for eight rated retail corporate credit unions, while lowering their individual stand-alone ratings.

On February 10, 2009, Fitch raised the Support Rating, which measures the probability of external support from the government, for all rated corporate credit unions from 4 to 1. A rating of 4 means there is limited probability of support, while a rating of 1 means a very high probability of external support. As a result, the Support Rating Floor was raised 10 notches from B to A+. Before the financial crisis, retail corporate credit unions rated by Fitch had Support Rating Floor of B.

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