With this rule, there are so many different aspects, it's not so much whether we support or oppose it, it's more a matter of to what degree, and seeing if all the requirements will work together to get us back up to the place we want to be. It will be a balancing act to limit risk to the point that we don't find ourselves back in the same situation again yet create a corporate system credit unions want to use. Success will be a matter of whether or not the corporates can create a viable business plan with the rules in place.
The capital rules very much in line with what we were thinking, and we agree with the limits on concentration risk. NAFCU didn't go as far as the NCUA in terms of requiring board members to have specific titles. We don't object to qualified boards, but it's certainly possible for someone to be qualified and not hold one of those titles, so we'll have to see how that one plays out. It's good to see more emphasis on natural person credit unions being on the board of U.S. Central, but NAFCU took the approach that credit unions and corporates should decide. We don't necessarily want the NCUA to prescribe corporate governance.
Director of Regulatory Affairs
At first blush, taken together, the capital requirements, investment restrictions and ALM requirements are at least a good first step. My primary concerns on investment section is I think it could go further in restricting private-label mortgage-backed securities and possibly commercial mortgage-backed securities. It prohibits CDOs and NIM, and that makes sense. And it basically says investing in highly rated, first-priority tranches of private-label mortgage-backed securities is okay. Yet, we've seen highly rated first-priority private-label MBS fall to junk status and at least run the risk of not continuing to pay as scheduled because the supports go away and the underwriting wasn't good to begin with.
So, without a more specific due diligence requirement, I have to question whether or not it goes far enough. I'm thinking maybe they should prohibit private-label MBS altogether. Yes, I understand that corporates need to invest beyond what natural person credit unions are allowed, but it's clear to me the risk of these securities was underestimated and misunderstood.
We're appreciative the NCUA consulted and worked with state regulators, and I don't think we're surprised by anything they are proposing. It's important to be recognized by the NCUA, to have state regulator perspective represented in the proposed rules and have that authority recognized. We're pleased with that.
Mary Martha Fortney
I think its good. I have no argument with what the NCUA has done here, but it doesn't go far enough because the problem isn't limited to the corporate system. The NCUA still must reform the share insurance fund, address systemic risk and modernize things that are outdated and flat out rinky-dink in this industry. And, there is some extremely scary exposure that remains in the corporates. How will credit unions pay for it?
This plan seems to hinge upon credit unions recapitalizing corporates, and I'm concerned they won't, even if corporates merge into just a few institutions. And if somebody comes up with a business plan that works for corporates, I'd like to see it, and I'd be all for it. But even that wouldn't mitigate the bigger problems like as long as corporates are federally insured and the share insurance fund isn't risk rated, retail credit unions still have added exposure.
I still think the CLF should be transitioned out. It was hardly ever used before, and now it's being used in a way that wasn't intended. Although, it was done legally and was pretty smart at the time. Given the circumstances, I probably would have made the same choice. But that borrowing ability represents huge exposure, especially if it's misused.
Umholtz Strategic Planning