Regulators worked on Saturday to assess troubles at the largest U.S. corporate credit union with the aim of keeping liquidity flowing through the nation's 7,800 credit unions.

A new chief executive will take charge on Monday at U.S. Central Federal Credit Union following seizure by regulators on Friday. The institution, with $34 billion in assets, provides settlement services used by more than 90 percent of all U.S. credit unions, which are member-owned lending institutions.

The National Credit Union Administration, or NCUA, took control of U.S. Central as well as Western Corporate (WesCorp) Federal Credit Union of San Dimas, California, another corporate credit union with $23 billion in assets.

We took action to protect the assets, the share insurance fund and its members, NCUA regional director Keith Morton said in an interview from the Lenexa, Kansas, headquarters of U.S. Central, where he and other officials were working on Saturday.

NCUA officials cited declining values of mortgage- and other asset-backed securities as the core problem.

The action highlighted strains in the nonprofit banking sector that recently had been touted as a source of new lending even as many for-profit banks limit lending and receive billions of dollars of taxpayer-funded capital injections.

Corporate credit unions provide services such as lending and payment clearance services to retail credit unions.

NCUA officials would not disclose a specific loss figure for U.S. Central.

They have a significant amount of risk ... assets that are currently not marketable, said Morton.

A NCUA risk analysis completed this month put potential credit losses throughout the credit union system as high as $16 billion, with a most reasonable estimate in the current environment of $10.8 billion.

SYSTEM BLINKING RED?

Warning signs had been mounting in recent months.

In February, U.S. Central said it replaced the executive who had been overseeing the credit union's investment portfolio, putting the division under the direct supervision of then-CEO Francis Lee.

Lee himself will now be replaced on Monday by regulators with James Nance, a former U.S. Central executive who oversaw the institution's assets and liabilities in the early 1990s.

In January, NCUA injected $1 billion into U.S. Central after the corporate credit union suffered dramatic declines in the value of mortgage-backed securities it had bought.

But a continued decline in mortgage values and a lack of marketability for a variety of underlying securities triggered the conservatorship when it became clear the liability to the reserve fund that backs credit unions had risen sharply to an estimated $5.9 billion from $4.7 billion, officials said.

Marla Marsh, chief executive of the Kansas Credit Union Association, whose members are among those relying in part on U.S. Central, called the takeover a stabilizing maneuver.

She said U.S. credit unions generally remained healthy, well-capitalized and eager to lend.

The corporate system has the strain on its liquidity and capital due to the credit market fluctuations, but we still remain overall healthy and sound, she said. We continue to be a safe place for consumers to use for lending and savings.

John Kutchey, deputy director of the office of examination for the NCUA, said U.S. Central's mortgage securities were for the most part well-rated. The blame for the credit union woes were due more to market woes than mismanagement, he said.

The downward spiral in real estate values is really the core issue that led to the decline in value and performance of the mortgage-backed securities, he said.

Morton said the NCUA was not planning to inject additional funds into U.S. Central but cited the need to increase the reserve fund, which helps back U.S. Central assets and is funded by member credit unions.

NCUA moved in January to guarantee $80 billion that U.S. credit unions have on deposit in the corporate network, a move considered a bailout of the U.S. credit union network.

(Editing by Peter Bohan and Xavier Briand)

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