Credit unions pay for risk taking of a few

I recently wrote about some of the benefits of working with credit unions.  While I still believe that credit unions can offer great financial services to many, there are still some risks associated with credit unions.  A client just forwarded an article to me that came out on Monday about many credit unions being in financial trouble due to the risk taking behavior of a few of the larger corporate credit unions.  You can read the article on MSNBC by clicking here.

Credit unions are overseen by the National Credit Union Administration, a U.S. government agency.  They have their own insurance fund similar to FDIC that all the credit unions pay into.  They also have their own form of the Federal Reserve system, which is a smaller group of larger corporate credit unions who serve the smaller individual credit unions.  When the smaller credit unions have excess funds, they can deposit the money with the larger corporate credit unions.  Then the corporate credit unions can loan out the money to other credit unions who have higher loan demands, etc.

A few of the larger corporate credit unions got caught up in buying mortgage backed securities issued by Wall Street in an attempt to earn higher returns.  This of course resulted in some huge losses, which are now being passed on to all the smaller credit unions.  In the credit union world, they all share in the losses of each other.  So now, huge assessments are being made to all the smaller credit unions, which are eating up their profits, and putting some on the verge of collapse.  Because of this, the number of credit unions is expected to fall sharply.  It could take decades to pay off the huge losses that have occurred.

The nations credit unions total deposits are about $729 billion.  The losses from these mortgage backed securities are estimated to be between $8.3 billion and $10.5 billion.  So far, they’ve only been assessed with about $1.3 billion in losses.  The rest will be spread out over the next decade.

The questions now that remain are:  How many credit unions will be brought down by these loss assessments?  And will credit unions be able to continue to pay higher rates and have lower fees than commercial banks?

You can look up the financial strength of any credit union in the country by going to:

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