How Your Credit Union is Helping Fix the Credit Crisis

The Central Liquidity Facility (CLF) is to credit unions what the Federal Reserve is to commercial banks, an institution designed to provide liquidity and be a lender of last resort. Established by Congress in 1998, the CLF is designed to service real-person credit unions; and, like the Fed, is backed by the full faith and credit of the United States government.

Last year, the NCUA, the body that administers the CLF, decided to extend CLF funds for needs other than liquidity. They created two programs, not tied to the Troubled Asset Relief Program (TARP), and funded the initiatives with about $41-billion.

Credit Union System Investment Program

One of the programs, the Credit Union System Investment Program (CUSIP), allows creditworthy credit unions to borrow funds from the CLF and invest the proceeds in participating corporate credit unions (who are not allowed to borrow directly from CLF). For participating in the program, the credit union receives a 25 basis point spread.

For example, Real Person Credit Union is a very health institution while its Partner Corporate Credit Union suffers from liquidity issues (for whatever reason). Real Person borrows $10-million from CLF at an interest rate of 1.25%, and then turns around and lends that $10-million to Partner Corporate at an interest rate of 1.50% for 12 months. Real Person Credit Union earns 0.25% on the $10-million, or $25,000 for the 12-month term, while Partner Corporate is able to extend credit to an external secured creditor. The goal of the initiative is to inject liquidity into corporate credit unions, who have been hurt more by the housing bubble than real person credit unions (See Diagram).

This brings me to a point not mentioned in all of the discussion about the “banking crisis.” American credit unions, for the most part, are in fantastic financial shape.

Credit Unions Are Healthy with Strong Balance Sheets

Credit unions are well capitalized with an overall capital-to-asset ratio of 11.1-percent industry-wide. Compared to commercial banks, which have a capital-to-asset ratio of about 10-percent, credit unions have a $90-billion capital cushion.

For example, the Argonne Credit Union, where I serve on the Board of Directors, needs $12.4-million in capital to meet the reserve requirement for institutions our size. At the end of June, 2008, we had $18.7-million in capital, $6-million more than required.

Credit Unions Have Steered Clear of the Sub-Prime Mess

In the first four months of 2008, mortgages at credit unions grew faster than all other loans. This, at a time, when mortgage losses have forced other lenders to scale back or close their doors entirely. Why?

First, credit unions operate more conservatively and tend to hold more of their mortgage loans (about 70-percent) in portfolios rather than sell them to Fannie and Freddie on the secondary market.

Second, credit unions are member-owned and not-for-profit cooperatives. We exist to serve our members, not profit from them. Unlike banks and brokers, we’re not out to force loans on our members just to make a buck.

Credit Unions Are a Safe Harbor for Consumer Savings

Savings at credit unions in the first half of 2008 grew nearly 7-percent. In today’s economy, consumers are increasing their savings in response to concerns about their economic future. Our members have a very stable savings vehicle that offers good rates of return.

Your Credit Union Can Help Fix the Credit Crisis

The CUSIP program, as mentioned earlier, is designed to allow health credit unions to help troubled corporate credit unions. While there are many commercial banks that could execute a commercial version of CUSIP, the overall health of credit unions is better. The government, through NCUA, is allowing credit unions—such as yours—the opportunity be part of the solution rather than the problem.

In the end, this is good for the economy (through infusion of liquidity) and to the credit union members who receive the benefit of a safe investment of excess reserve capital.

Here are other articles I have written on this topic:

• The Future of Corporate Credit Unions
• A Brief Explanation of the Credit Union System
• Previewing the Illinois Credit Union League Convention
• Argonne Credit Union Board Passes Merger Resolution
• Credit Union Board of Advisors
• ACU in Black for Second Year
• Final Thoughts on the 2009 ICUL Convention
• The Best ICUL Session: Succession Planning
• ICUL Legisltative Update
• Three Must Sees at the ICUL Convention