Too interconnected to fail

by. Keith Leggett

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)

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