Credit unions and the NCUA have made tremendous progressover the past five years in resolving the corporate credit unioncrisis.

Now that the remaining projected Corporate Stabilization Fundassessments are lower than the total assessments charged through2013, it's a good time to reflect on the road ahead, as well as onhow far we've come.

In 2008, five troubled corporate credit unions suffered massivedeclines in the market value of their investment portfolios due togrowing credit losses resulting in other than temporary impairmentcharges under accounting rules. As a result, the corporates lostbillions of dollars, which depleted their capital, and many membercredit unions began withdrawing funds, creating severe liquiditypressures.

Many other credit unions began putting their remainingmembership capital on notice for withdrawal, further straining thecorporates.

It became clear that these corporates could not recover on theirown, as they were experiencing insurmountable market and economicturmoil. Only the NCUA's intervention and extraordinary liquiditysupport stemmed this lethal outflow.

Thorough reviews by the Government Accountability Office and theNCUA's Office of the Inspector General confirmed the NCUA's actionsto conserve the five troubled corporate credit unions werenecessary and timely.

The five corporates were no longer viable from threeperspectives:

1. Economically, their assets were worth far less than theirliabilities under both fair and realizable value bases.
2. Based on accounting rules, they were required to takeinvestment write-downs through their income statements, depletingall capital in U.S. Central and WesCorp and leaving the three othercorporates critically undercapitalized.
3. These corporates were illiquid and depended on extraordinarygovernment support.

Consistent with principles set by Congress for consumer creditunions, the NCUA needed to take prompt corrective action or riskgreater losses.

If the NCUA had let the failed corporates continue to operate,the consequences would have been untenable.

• If the full extent of the failed corporates' losses hadcascaded down to consumer credit unions, as many as 2,500 morecredit unions would have failed. The first wave of more than $30billion in capital losses would have caused 850 to 1,200 creditunions to fail. These losses would have depleted the NationalCredit Union Share Insurance Fund. Compounding these losses, allfederally insured credit unions would have been forced to write offmost of their 1% Share Insurance Fund deposit.
• At the same time, the NCUA would have been required to chargemultiple premiums to restore the SIF to its minimum normaloperating level. These write-downs and premiums would havetriggered a second wave of losses, causing another 100 to 1,300credit unions to fail. The total cost to the system would have beenin excess of $40 billion.

Instead, the NCUA's innovative actions saved the credit unionsystem from a catastrophic collapse.

Managing the Losses

As part of the share insurance system, all federally insuredcredit unions have borne the losses from the failed corporates. Tomanage those costs over time – rather than assessing credit unionsfor billions of dollars in corporate losses in a single year – theNCUA worked with Congress to create the Corporate StabilizationFund. Later we created NCUA Guaranteed Notes to reduce theimmediate impact of the legacy asset losses and damage to thesystem. To align the Stabilization Fund with the lifespan of theNGNs, we worked with the Treasury Department to extend the lifespanof the fund from 2016 to 2021.

From 2009 through 2012, short-term cash needs to satisfymaturing obligations of the corporates' asset management estatesdrove annual assessments.

Now the primary remaining obligation is repaying Treasuryborrowings and interest.

The NCUA has discretion on the timing of Treasury repayments,and the loss projections on the legacy assets have improved thisyear. In setting the 2013 assessment, the NCUA considered:

• The agency has $6 billion in base borrowing authority shared bythe Share Insurance Fund and the Stabilization Fund. Of that, $4.7billion is committed to outstanding Treasury borrowing, leavingonly $1.3 billion available for cash management, includingobligations related to the NGNs.
• Realized losses on the legacy assets to date, about $7.5billion, exceed the depleted capital from the failed corporates byabout $2 billion.
• Stabilization Fund assessments to date total about $4.8billion, including the 2013 assessment. Even with the improvinglegacy asset projections, assessments to date are still short ofthe low end of the projected net remaining assessments range.

With these factors in mind, the NCUA Board determined that thebest available option when setting the 2013 Stabilization Fundassessment was 8 basis points, the lowest assessment in the pastthree years.

Next Page: The Road Ahead
The Road Ahead

An improving economy and growing credit union strength arehelping to smooth the road ahead. If loss projections continue toimprove, the low end of the range may decline to the point where nofuture assessments would be needed – provided actual losses comeout at the bottom of the range.

The NCUA has the flexibility to take industry performance andfuture uncertainties into account when determining StabilizationFund assessments. If losses are higher, the NCUA must make guarantypayments to NGN investors. If losses are lower, NGN investors willget paid faster, saving credit unions money and making fundsavailable at the end of the life of the NGNs to repay remainingresolution obligations or be refunded to credit unions.

Based on projected residual legacy assets value, the NCUA Boardmay have more flexibility in future years to wait for the NGNs tomature to repay the Treasury in whole or in part.

Keep in mind that “projected net remaining assessments” meansthe estimated remaining costs to be borne by credit unions over thelife of the NGN program as a result of any shortfall of cashinflows versus outflows. However, it does not account for thetiming of cash flows. Remaining cash flows include guarantypayments on some NGNs, assets remaining to be monetized from thefailed corporates, and some projected residual value remaining fromthe legacy assets collateralizing the NGNs that will not beavailable until the NGNs mature.

One last point: NCUA's projections are driven primarily byindependent modeling of cash flows that are updated regularly bythe investment management firm BlackRock Solutions. Projections arepoint-in-time estimates that can change.

The legacy assets are very complicated; it's hard to preciselypredict borrowers' behavior and where the economy is headed. Thereare other factors, such as potential future legal recoveries, thatcan't be estimated at this time.

The corporate crisis threatened the future of the entire creditunion system and demanded decisive intervention. Based on the bestpossible information, the NCUA created a sound, transparentstrategy to get the industry through an unprecedentedsituation.

Each year the NCUA carefully evaluates all the considerationsthat go into assessments, consistent with legacy assets and creditunion performance. We are confident we will bring this difficultchapter in the industry's history to a successful close.

Larry Fazio is directorof the NCUA's Office of Examination and Insurance.