Wholesale Credit Union System Revamped, Three Wholesale CUs Seized

Wholesale Credit Union System Revamped, Three Wholesale CUs Seized

Regulators just announced a revamping of the nation’s wholesale credit union system. Although customers won’t see an immediate change at their local credit union, some analysts speculate the change could spur higher interest rates on loans and lower interest rates on deposits in the future.

Federal regulators announced Friday that they are taking over the nation’s wholesale credit union system to rescue it. The wholesale credit union system doesn’t directly interact with the general public, but they provide services to thousands of credit unions across the country by investing money and providing other services to credit unions like check-clearing.

The Wall Street Journal reports that the move includes the seizure of three wholesale credit unions. Last year, the government seized the two largest wholesale credit unions after discovering their losses were far greater than they reported. Wholesale credit unions are supposed to invest in only safe assets, but some—like the wholesale credit unions seized—invested in riskier securities like subprime mortgages to chase higher returns. On Friday, regulators indicated they have a plan to manage $50 billion of troubled assets from failed institutions.

To minimize losses to the credit union industry, regulators will move the devastated securities into a good-bank/bad-bank structure and the National Credit Union Administration will manage the $50 billion portfolio of the failed wholesale institutions. Credit unions will be able to continue dealing with the “good bank” operations for the next two years, while retail credit unions begin winding down relationships with the failed institutions.

Analysts note that the customers won’t see an immediate change at their credit union, but if the credit unions can’t cover their obligations, higher interest rates on loans and lower interest rates on deposits may be on the horizon. The Wall Street Journal notes that since the start of 2008, only 66 retail credit unions have failed, in comparison to over 290 banks and savings institutions.

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