Financial institutions continue to fail, and it’s just not banks and not just in the US.
Friday saw US regulators seized three corporate credit unions, while two more small local banks failed.
That takes to five the number of these big corporate credit unions that have failed in the past 19 months in the US, while 127 banks have so far failed this year while a further 140 collapsed in 2009.
The news confirms that while the finance sector is getting better, there are still significant weaknesses in the US, Japan and Europe, especially in Ireland and Spain.
In fact we should also have details on Thursday night, our time, of the cost of bailout and wind down of one of the worst casualties, Anglo Irish Bank.
A believeable plan and cost (Anglo Irish has already received around 23 billion euros of Government aid), could see the present strains in European financial markets ease.
Closing the bank straight away would cost a reported 70 billion euros, and place huge strains on Ireland’s finances and credit rating for years because of an expected shortfall of tens of billions of euros.
It would also raise the spectre of Ireland defaulting on some of its debts.
A key to the deal this week is the way that the debt in the stricken bank is treated, especially subordinated debt. If those lenders are forced to take a loss, it may be construed by the markets as being a partial default.
In Japan, reports surfaced yesterday that the country’s third largest consumer lender, Takefuji Corp was reported to be about to file for bankruptcy in Tokyo with debts of around $US5 billion.
It later said it would not go into bankruptcy protection, but would try to restructure to survive. It will be a big ask as the company and its peers seem to be running out of money.
The problems follow failure of the small privately-owned Incubator Bank, which collapsed earlier this month in Japan.
The failures of the three US credit unions will see losses in the billions of dollars taken over the next 10 years.
All up the losses from the failure of the five corporate credit unions (which have as their clients other credit unions and not individuals) could rise to more than $US9 billion, significant losses even recent American standards.
But the final tally won’t be known for at least a decade while the industry regulator repackages about $US50 billion in troubled assets from these and the previous seizures.
Some $US35 billion in bonds will be created to sell to investors, meaning there’s shortfall of at least $US15 billion in a worst case. Some $US10 billion in federal aid will be repaid by the sale of the bonds as well.
That is expected to net out at around $US9.2 billion. The best case is that losses total ‘only’ $US7 billion.
US taxpayer’s wont meet the cost, the 90 million members of US credit unions will be a special levy for up to the next decade to meet these costs a
The regulator said it was creating bridge institutions to handle the “good bank” and “bad bank” sides of the seized firms.
About $US65 billion in assets will be put into the stronger of the two, while the “bad bank” is used to sell $US35 billion of bonds backed by the $US50 billion in distressed securities.
The offering is over-collateralized, meaning the assets are worth far more than the debt owed, and any losses or gains from the underlying assets will be borne by the government, the regulator said. Losses would have to be 30% or more of the $US50 billion in bad bank assets.
The NCUA said it put in place on Friday regulations requiring corporate credit unions to hold higher levels of capital and setting risk limits.
The institutions seized on Friday were Members United Corporate Federal Credit Union of Warrenville, Illinois; Southwest Corporate Federal Credit Union of Plano, Texas; and Constitution Corporate Federal Credit Union of Wallingford, Connecticut. They had about $US16 billion in assets.
The seizures come after the NCUA last year took over two other such institutions: U.S. Central Corporate Federal Credit Union of Kansas and Western Corporate Federal Credit Union of California.
They had assets of around $US57 billion and losses of several billion dollars, as well as borrowings from the Federal Government of over $US1 billion. Assets from the two are being sold off gradually by regulators.
US group, Highline Financial analyzes the banking and finance industry in America.
It says US banks and credit unions are getting stronger. Highline publishes solvency ratings on banks, savings and loan institutions and credit unions. The ratings measure capital adequacy, asset quality, earnings and liquidity.
At the end of June, there were 99 credit unions that faced an extreme risk of failure, down from 138 a year earlier.
Last year, 15 credit unions failed. This year, 15 have failed so far, according to the firm’s data. In contrast, 127 banks have failed so far in 2010.
