THE VIRGINIAN-PILOT
Copyright (c) 1995, Landmark Communications, Inc.
DATE: Sunday, August 13, 1995 TAG: 9508140110
SECTION: BUSINESS PAGE: D1 EDITION: FINAL
SOURCE: BY TOM SHEAN, STAFF WRITER
LENGTH: Medium: 78 lines
The damage first showed up in mutual funds.
Then scores of corporations, banks and even municipalities like Orange County, Calif., suffered losses last year on mortgage-backed securities.
By last December, similar problems had surfaced at credit unions.
With the sharp rise in interest rates throughout 1994, the complex mortgage securities held by some credit unions had lost much of their market value.
One of those injured was Capital Corporate Federal Credit Union in Lanham, Md., which had more than 60 percent of its $1.6 billion of assets tied up in the interest-sensitive securities.
Federal regulators seized the crippled credit union in January when it lacked the cash to meet its obligations to other credit unions in Washington, Maryland and Delaware.
Suddenly 42 other corporate credit unions, including Virginia League Corporate Federal Credit Union in Lynchburg, found themselves under the harsh glare of adverse publicity.
Like other corporate credit unions, Virginia Corporate was created in the 1970s to make investments on behalf of regular credit unions. Corporate credit unions also provide their member credit unions with short-term loans and handle administrative tasks, such as clearing checks.
Virginia Corporate, which is owned by 276 credit unions in the state, never invested in the types of mortgage securities that brought down Maryland's Capital Corporate, said Rick Pillow, a Virginia Credit Union League vice president who oversees Virginia Corporate.
Instead, Virginia Corporate passed on most of the excess funds from Virginia credit unions to a larger corporate, U.S. Central Credit Union. This Kansas-based organization invests on behalf of corporate credit unions throughout the country.
``They have always maintained the highest safety and soundness'' in their investment practices, Pillow said.
But Virginia Corporate and other corporate credit unions are bracing for tougher regulation of their investment activities. The new rules, which are still be written, could reduce the earnings and increase the operating costs of corporate credit unions, Pillow said.
In a report to Congress on the failure of Capital Corporate, the General Accounting Office recommended in February that the National Credit Union Administration take several steps to prevent similar failures. These included:
Closely monitoring the financial conditions and risk-taking at corporate credit unions and large regular credit unions.
Making sure that corporate credit unions install systems for managing their financial risks. The systems should be able to test the impact of changes to individual investments and to the entire portfolio.
Developing and enforcing capital standards that account for all types of risks to a credit union.
The National Credit Union Administration is rewriting rules that would put some of these recommendations in place.
Warren Heller, research director for the financial research and publishing concern Veribanc Inc., said he saw no immediate threat to the safety of the nation's regular credit unions from the problems at some corporate credit unions.
``The credit union industry is quite healthy,'' he said.
But regulators should look more closely at the investment activities of corporates and require them to maintain higher levels of capital, he said.
``Most corporate credit unions have exceeding low levels of capital,'' Heller said. Capital provides a financial institution a cushion against losses.
That might have been justified in the past because corporate credit unions tended to avoid risky investments. But with some corporates investing in interest-sensitive mortgage securities, the situation is dramatically different, he said. ILLUSTRATION: Graphic
VIRGINIA LEAGUE CORPORATE FEDERAL CREDIT UNION
SOURCES: Virginia Credit Union League, Bauer Financial Reports Inc.
[For complete graphic, please see microfilm]
by CNB