PLANO, Texas (4/8/09)--Southwest Corporate FCU made a number of recommendations in a comment letter to the National Credit Union Administration Board Friday on the Advanced Notice of Proposed Rulemaking for Corporate Credit Unions. NCUA is evaluating corporates' role in the Credit Union System and considering whether to amend the corporate credit union regulation (Part 704) to clarify or revise provisions that include capital, permissible investments, management of credit risk and liquidity, and corporate governance. In the letter, Southwest Corporate President/CEO John Cassidy acknowledged that multiple factors contributed to the current market dislocation and the resulting issues facing all financial institutions, including corporate credit unions. "There is clearly a need to apply the lessons learned and to take a fresh look at corporate credit union operations," Cassidy said. "Regulatory changes must be done in a thoughtful and prudent manner to ensure corporate credit unions can continue to provide valuable products and services to their member credit unions." Cassidy's letter addresses the role of corporates in the Credit Union System as it relates to payment systems, liquidity and liquidity management, field of membership, expanded investment authority, and the two-tiered system structure. It also addresses corporate capital issues--including core capital, membership capital, and risk-based capital and contributed capital requirements. Other areas with recommendations include permissible investments, credit risk management, asset liability management, and corporate governance. For payment systems, the Plano, Texas-based corporate made two recommendations: 1) Address payment systems risks through enhanced liquidity management practices, capital requirements and investment management, and 2) neither segregation of payments processing operations nor establishment of separate corporate credit union charters is necessary to mitigate payment systems risks. Southwest Corporate made four recommendations regarding liquidity and liquidity management:
* Providing liquidity to member credit unions should remain a core service provided by corporate credit unions; * Enhanced liquidity management practices should be implemented; * As a risk-limiting constraint, use cash flow gap rather than cash flow duration; and * Broaden the Central Liquidity Fund's lending capabilities.
As for field of membership, Southwest Corporate recommended that corporate credit union restructuring is necessary, but it should be an evolutionary process driven by ANPR reforms and decided by member credit unions. It also recommended keeping national fields of membership. Expanded investment authority included three recommendations: Expanded investment authorities are needed for diversification; require minimum total capital ratio requirements for expanded investment authorities; and maintain the authority for qualified corporate credit unions to engage in derivative transactions. As to the two-tiered structure of the corporate system: U.S. Central should not continue in its current form, and U.S. Central should evolve into a new role, not as a wholesale corporate credit union but as a credit union service organization (CUSO) provider of off-balance-sheet products and services, wrote Cassidy. Southwest Corporate's core capital recommendations included increasing capital ratio requirements at all corporates; establishing a minimum operating income target of at least 15 basis points; requiring all credit unions using corporate credit unions' products and services to contribute capital; and granting a reasonable transition period. Membership capital recommendations included:
* Require all credit unions using products and services offered by corporates to contribute capital, comprised of PIC (part of core capital) and MCS (part of total capital); * Extend the notice period on MCS to five years. * Base credit union member contributed capital on a percentage of a member credit union's asset size; and * Grant a reasonable transition period.
The letter also recommended that a risk-based capital requirement be implemented. Two recommendations were made under permissible investments: Establish concentration limits by investment sector and individual obligor, and major changes in current investment authorities are not warranted due to the combined impact of ANPR recommendations and broad global reforms. Under credit risk management, Southwest Corporate recommended that NCUA: Continue to rely on Nationally Recognized Statistical Rating Organizations' (NRSROs) ratings but with additional requirements; adopt further regulatory requirements regarding the use of ratings; adopt additional concentration limits; and test sensitivities to credit spread widening and standards to apply to that effort. The corporate made one recommendation each in asset liability management (ALM) and corporate governance. For ALM, require the use of net interest income modeling and stress testing. For governance, ensure that representatives from a corporate's member-owners continue to be the appropriate persons to serve on the corporate's board. The letter went into detail about each recommendation. To review further, use the resource link.