U.S. seizes top credit union clearinghouse

* U.S. Central has $34 billion in assets

* Settles for all other wholesale credit unions

* Western Corporate also seized

* Action comes as three small banks closed by FDIC (Adds NCUA spokesman, moves to bolster insurance fund)

By Karey Wutkowski

WASHINGTON, March 20 (Reuters) - Regulators seized the top clearinghouse for U.S. credit unions, citing a critical deterioration in the finances of the provider of services to thousands of retail credit unions.

The National Credit Union Administration (NCUA) took control of U.S. Central Federal Credit Union, a huge wholesale credit union with about $34 billion in assets based in Lenexa, Kansas.

It also seized Western Corporate (WesCorp) Federal Credit Union of San Dimas, California, another corporate credit union with $23 billion in assets.

Stress tests of corporate credit unions had uncovered an "unacceptably high concentration of risk" at these two institutions, the regulator said in a statement.

The immediate costs of the takeover are coming out of a $7 billion industry-maintained insurance fund, but will mean higher premiums levied on retail credit unions.

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

U.S. regulators also seized another three small banks on Friday, bringing the total to 20 so far this year.

U.S. Central and WesCorp were carrying the bulk of the soured mortgage-backed securities that have been causing woes to the corporate credit union industry, said NCUA spokesman John McKechnie.

"We've been intervening in the corporate networks... for several months now and it just got to a critical stage," McKechnie said. "In the last couple of months the problems have moved from liquidity to be more capital and asset-based."

In January the 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.

Corporate credit unions are the retail credit union's credit union, providing services including lending, and check and payment clearance services.

The NCUA also moved in January to guarantee the $80 billion that regular credit unions have on deposit in the corporate network. The moves were considered a bailout of the U.S. credit union network.

Credit union retail customer deposits are insured up to $250,000 per account, in line with bank deposits, a step taken last year as part of a wider effort to increase consumer confidence in banking.

The NCUA said service will continue uninterrupted at U.S. Central and WesCorp, and said member accounts are guaranteed through Dec. 31, 2010.

"When a credit union or a corporate credit union is taken into conservatorship... it remains business as usual, all insured deposits are protected," said Henry Kertman, spokesman for the California Credit Union League.

A HIT TO INDUSTRY EARNINGS

U.S. Central has 26 corporate credit union members and says it provides settlement services to 100 percent of corporate credit unions and 93 percent of all U.S. credit unions.

WesCorp based in San Dimas, California, has approximately 1,100 retail credit union members, the NCUA said.

McKechnie said the industry will have to pay an additional $1.2 billion to cover the resolution of the the two institutions, on top of a $4.7 billion assessment the NCUA announced earlier this year for its actions in January.

"The direct impact is going to be to the earnings of credit unions as they pay to replenish the fund," McKechnie said.

He said the NCUA does not anticipate having to tap into its $100 million line of credit with the U.S. Treasury Department, meaning taxpayers will not be on the hook for the latest dramatic financial rescue.

Legislation moving through Congress would increase the credit union industry's borrowing authority to $6 billion, and give it more time to replenish its insurance fund.

McKechnie said he would not speculate about any future actions the NCUA might have to take to stabilize the credit union industry, which he said is "very well capitalized at this point."

"I do think that we have taken whatever steps are necessary to maintain a well-functioning, safe and sound credit union industry," McKechnie said.

Separately, the U.S. Federal Deposit Insurance Corp said it had found other banks to acquire the deposits of TeamBank (TFIN.O) of Paola, Kansas, and Colorado National Bank of Colorado Springs, Colorado. But the FDIC became receiver of FirstCity Bank of Stockbridge, Georgia, and approved the payout of its insured deposits. (Reporting by Karey Wutkowski, Helen Chernikoff and Elinor Comlay; Editing by Tim Dobbyn)