Corporate Task Force Suggests Using CUSOs for Long-Term Investments to Reduce Risks
That is one of the recommendations of a 10-member task force appointed by CUNA and NAFCU to draft a report on the future of the corporate credit union system. To meet the long-term investment needs of natural person credit unions, the task force said it would be appropriate for corporate credit unions to own CUSOs that provide investment advisory and broker-dealer services. These CUSOs would assist credit unions in selecting, purchasing and managing long-term investments to be held on the balance sheets. Such CUSOs should only own long-term investments on a temporary basis as may be necessary to provide services to NPCUs, the report noted.
"Historically, when any of the corporate credit unions experienced changes, it's been in the investment arena. For restructuring to occur and for natural person credit unions to invest in, we asked, 'How do you take away the greatest risk?' That would be in the corporate investment arena," said Terry West, chairman of the CUNA task force involved in putting the corporate credit union report together and president/CEO of the $3.9 billion VyStar Credit Union in Jacksonville, Fla.
The task force suggested corporate credit unions should only be able to offer investments on their balance sheets with durations of 12 months or less, West explained. Anything greater than that can be provided by a CUSO for investment and broker-dealer services. The rationale is that corporates would have a layer of risk protection that could potentially thwart the tumultuous hazards the system underwent this year. Even then, a CUSO would not hold the investments on its balance sheet.
West said it is important to group the CUSO recommendation with the other suggestions in the task force report.
"All need to be considered in total. We know some credit unions want a long-term mechanism. The key point is corporate credit unions shouldn't hold all the risk," West said.
If the measure can keep risks to the corporate credit union system at bay, the recommendation is a good one, said Guy Messick, general counsel for NACUSO.
"It's better not to be as exposed to the market troubles that brought down the system. I think it's a good thing that risk allocations are being reassigned and limited and corporate credit unions can still provide essential functions for natural person credit unions," Messick said. "If there is a downturn in investments, you won't have a repeat of what we had: corporate failure and a severe run on the deposit insurance fund."
West said he is pleased with the outcome of the report and applauded CUNA and NAFCU for working together on recommendations to restructure the corporate credit union network. Both trade groups and the task force are scheduled to meet with the NCUA board over the next few weeks, he noted.