Puerto Rico’s Debt Crisis and Credit Unions

August 10, 2015 at 6:38 am Leave a comment

The impact that Puerto Rico’s decision to renege on paying a $58 million debt payment has a unique impact on credit unions that service the Island Commonwealth.

There are approximately 116 credit unions on the Island of Puerto Rico. Crucially, Puerto Rico has its own cooperative share insurance system, meaning that the hit suffered by these credit unions which reportedly purchased more than $1 billion in bonds backed by the Puerto Rican Business Development Authority shouldn’t impact the Share Insurance Fund. There are 12 Puerto Rican credit unions that are federally insured, but NCUA recently issued a statement saying that the fund shouldn’t be impacted by Puerto Rico’s fiscal woes.

More generally, the Puerto Rican debt crisis has put a spotlight on credit union practices. In yesterday’s New York Times, an article describing the impact that the bond default is having on average citizens prominently featured the plight of credit unions and is worth quoting extensively.

Until 2009, the credit unions could invest only in the highest-rated bonds. But local regulators made an exception as long as the credit unions invested in Puerto Rico bonds.

As a result, the credit unions went from owning zero Puerto Rico bonds to holding about $1.1 billion worth today. And nearly half of the credit unions’ holdings is concentrated in debt issued by the island’s Government Development Bank, which has served as an emergency source of cash for the commonwealth. Because of concerns that the Government Development Bank may soon default, its debt trades as low as 29 cents on the dollar — raising fears in banking circles that losses on the credit unions’ holdings could force some credit unions to limit their lending.

A local banking regulator, Daniel Rodríguez Collazo, said the credit unions had enough cash to absorb any blow. Still, they are working with the government to restructure their holdings in ways that would minimize their losses.

Not surprisingly, the crisis has also not escaped the watchful eye of the ever vigilant, albeit semi-retired Keith Leggett. In a recent blog on the subject, Keith pointed out that the financial problems faced by these credit unions are exacerbated by the fact that they purchased some bonds from the Public Finance Group, a public authority. Unlike general obligation bonds, these bonds are paid out of appropriations made by the Puerto Rican legislature. Needless to say, that body doesn’t seem to be in much of a mood to be bailing out creditors.

Entry filed under: Economy, Regulatory. Tags: , , .

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Authored By:

Henry Meier, Esq., General Counsel, New York Credit Union Association.

The views Henry expresses are Henry’s alone and do not necessarily reflect the views of the Association.

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