WASHINGTON (4/7/09)--A revamped corporate credit union system would be most effective if it offered limited services (leading to reduction in the number of corporates), served a national field of membership, met stronger capital requirements, and included a prescribed number of “outside directors” who could “contribute diverse experiences” to a corporate’s board, the Credit Union National Association (CUNA) has written in a comment letter to the National Credit Union Administration (NCUA). In its letter to NCUA on the agency’s “advance notice of proposed rulemaking” (ANPR) on corporate credit unions, signed by CUNA President/CEO Dan Mica and Terry West, chairman of CUNA’s Corporate Task Force (and president/CEO of Vystar CU, Jacksonville, Fla.), CUNA acknowledged that the NCUA Board must first deal with stabilizing the corporate credit union system, and then make a transition to a revised system. However, when the time to make revisions comes, CUNA suggested several major changes:
* Corporate credit unions should focus on core services of settlement, payment systems and meeting short-term investment and liquidity needs of member credit unions. Corporates’ investment authority should be carefully reviewed and concentrations in long-term, on-balance sheet investments should not be permitted, due to the past inability of corporates to reasonably manage or mitigate risk in these areas. * The two-tier system of U.S. Central and many corporates has outlived its utility. Additionally, characteristics of that system that facilitated undue risk taking, reduced credit unions’ capital and created inefficiencies must be eliminated. The appropriate number of corporates in the future will depend on the primary functions and services that corporates will be allowed to provide. “Processing payments and handling settlements are scale businesses, so the number of corporate credit unions can be sharply reduced to a very small number,” the letter states. “With only a few, large corporate credit unions serving natural person credit unions, there would no longer be the need for a two-tiered system.” * With a small number of corporates operating in the future, each should have a national field of membership, which would foster competition and thus innovation. (However, CUNA wrote, it “understands that competition among corporate credit unions may have in the past contributed to thinly capitalized institutions, operating on very low margins taking significant risks.” CUNA noted, however, that with “sufficient capital requirements and with investments restricted to only those necessary to perform short-term investing and liquidity,” competition among the corporates would better serve credit unions “in a context of full safety and soundness.” * Tier 1 capital requirements should be at least 4% and could be as high as 6% (over a reasonable period of time). Risk-based capital should also be required, and natural person credit unions that use corporates should be required to “maintain contributed capital in their corporate.” The CUNA letter noted that “if NCUA chooses to institute risk-based capital requirements for corporate credit unions, such risk-based capital should be comparable to those applicable to similarly situated Federal Deposit Insurance Corp. (FDIC)-insured depository institutions.” However, if NCUA adopts CUNA’s recommendations for limits on corporate business and investment activities, “risk-based requirements are likely unnecessary.” * Corporates should be permitted to have outside, non-member directors who can “contribute diverse experiences to a corporate credit union’s board,” CUNA wrote. Further, up to 20% of “non-member” board members should be permitted (if the members agree), and these members should earn a “reasonable director’s fee.”
In other points raised in the letter, CUNA called it “imperative” that NCUA take additional steps to assure credit unions that it will not sell securities of U.S. Central and Western Corporate (WesCorp) FCUs “prior to almost complete amortization.” The only caveat CUNA suggested: If NCUA can work with the U.S. Treasury Department to obtain a favorable price well above the current market value for the securities before they mature. CUNA also used the comment letter as an opportunity to review the impact of NCUA’s corporate stabilization program on credit unions, noting the high costs. Along those lines, CUNA stated it will “continue to do all we can to attain a better outcome for credit unions than the current situation, including through assistance from the U.S. Treasury.” CUNA commended the NCUA Board for its announcement late last week to make more information from the PIMCO report available to the credit union system. While CUNA said it "appreciates the latest agency memo to examiners" that credit unions have some flexibility in delaying the reporting of the impairment of the NCUSIF deposit, issues relating to the reporting of the impairment of corporate credit union capital have not been resolved because the estimates of the losses from U.S. Central and WesCorp are still under review. CUNA indicated it wants to work with NCUA to provide clarify to credit unions on the accounting issues. For the full letter, use the resource link.