Friday, May 15, 2009

This Week in Bank Failures

Credit unions are not so safe after all. The credit union that failed tonight, Rouge Employees Credit Union, looked like a perfectly ordinary credit union, aside from the economic risks associated with its location in Dearborn, Michigan. It had 6,200 members and $23 million in assets.

The National Credit Union Administration (NCUA) handled the failure in much the same manner as a routine bank failure, by arranging a purchase and assumption. Chief Financial Federal Credit Union of nearby Pontiac, Michigan, purchased the assets and took custody of the accounts of the failed credit union. The former members of the failed credit union will have uninterrupted access to their accounts. With this transaction, Chief Financial FCU’s membership has become almost 50 percent larger.

In South Florida, BankUnited reportedly now has three bids, but all three bids are considered likely to fall short, and the deadline for bids has been extended again in the hope of attracting at least one valid bid. BankUnited’s financial results are not likely to encourage bidders, however. The bank, which has a troubling net worth below zero, also paid more in interest on deposits than it received in interest on loans in the first quarter, a circumstance that virtually ensures a stiff operating loss for a bank, no matter how well it is managed. Interest rates on loans are much higher than interest rates on deposits, so the results would seem to indicate that a significant fraction of BankUnited borrowers are not making payments on their loans. That is a financial difficulty that would seem to prevent any existing bank from buying BankUnited intact.