The investment restrictions, coupled with the capital requirements, in the proposal, while different from the original idea that was floated, are the crux of the problems for the future of most if not all of the corporates. The proposal would set specific concentration limits by investment sector, ranging from residential mortgage-backed securities to corporate debt obligations among others. This is a wise move that the agency should have followed through on in its previous revisions to the corporate regulation. However, it caved to industry pressure, which is-in part-why we're witnessing some of the problems that we are today. The largest corporates (those representing the largest risk to credit unions and the insurance fund) became overly reliant on MBS, and they heavily invested in them. The rest is now history.
The proposal will also limit corporate credit unions' ability to participate in mezzanine residential MBS and other subordinated structured securities that present higher credit risk. It would outright prohibit collateralized debt obligations and net interest margin securities. The corporates would also have to get ratings from credit rating agencies and use only the lowest of the ratings; the ratings would be used only to exclude an investment and not necessarily as authorization. To reduce reliance on the ratings, the NCUA would continue the regulatory threshold for investment action plans and provide for appropriate asset-liability management. Part II expanded investment authority would be eliminated, making A-minus the lowest possible rated investment for corporates.
These items tied to increased capital requirements have corporates and others putting a magnifying glass to the proposed regulation. The current 4% minimum total capital would be replaced with a 4% minimum leverage ratio, 4% tier one risk-based capital ratio and 8% total capital ratio. It would take even more to be considered well-capitalized. Additionally, which is possibly the biggest hurdle for corporates, 100 basis points of the capital must come from retained earnings within six years and 200 basis points within 10 years. A corporate that does not make progress toward those goals (the NCUA gave 45 basis points in three years as its example) would be subject to a retained earnings accumulation plan, with NCUA retaining flexibility on those future benchmarks. The agency would also tighten nonperpetual contributed capital account (currently MCA) requirements from a three-year term to a five-year term. And there are many more restrictions in the 250-plus page proposal.
The agency rightfully has followed up so far with its promise not to require credit unions to recapitalize the corporates, which is good for credit unions seeking alternatives but not good for some of the corporates. Credit union executives are smarter than to throw good money after bad, not to mention many are being hounded by their boards about the losses they've already suffered as a result of the failed corporate credit unions. By not requiring credit unions to recapitalize the corporates, the NCUA is allowing the marketplace to determine their futures, but the fallout could be massive if a well-considered wind-down of the corporates that are unlikely to survive is not put in place. I haven't heard many ideas for this side of the dilemma other than establishing something similar to the Resolution Trust Corp.
Even for those corporates that were not so adventurous in their investments, the provisions dealing with mismatches regarding liquidity of assets and liabilities are an area they are closely studying.
I've had multiple conversations over the last couple of days with credit union folks and, without encouragement, they've said that when you delve down into it, some of the corporates, and credit unions generally, are getting away from their roots. I couldn't agree more.
So with that, I'll leave you with a quote from Jay Murray, CEO of one of the corporates still in fighting shape, that ran in Mid-Atlantic Corporate's December newsletter: "We impart mutually beneficial relationships to our member credit unions. Our voyage into the future will bring more challenges over the coming years. However, there is no more important time than the present to embrace our cooperative powers. We have not yet utilized the cooperative model to its greatest potential. Working together is what strengthens cooperatives and the cooperative movement, allowing them to serve their members effectively."
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