CUNA Panel Advocates Revamp Of the Corporate System
CUNA wants a pared down corporate credit union system that requires little new capital from natural person credit unions.
That's the vision outlined by the trade association's corporate credit union task force's report released last week during CUNA's GAC, which will serve as the basis for the association's comment letter on the NCUA's proposed corporate rule. The comment letters are due to the NCUA on March 9.
The report boldly stated that the corporate business model is no longer viable and natural person credit unions are unwilling to invest significant amounts of funds needed to recapitalize the corporates. It also said that "several groups of credit unions" are organizing their own cooperatives to replace them.
The task force envisions the corporates as limited to settling and payments services, and meeting short- to medium-term liquidity needs. Terry West, the panel's chairman and the president/CEO of Vystar Credit Union, said one change might be to have payment and settlement functions combined.
Investment services would be limited to agent or advisory roles, with investments remaining on natural person credit union balance sheets, removing what corporates claim is a vital source of revenue.
"Natural person credit unions will have to develop the skills and capabilities to hold securities on their balance sheets while the corporates will have to redo their business model," said Allied Credit Union President/CEO Frank Michael, a member of the task force.
At $19 million in assets, Michael's Stockton, Calif.-based credit union is representative of those that say they need corporate investment services to make up for a lack of expertise and staffing in their small shops.
The task force criticized the NCUA's lack of direction in an "orderly and successful transition of corporates to new regulatory standards like higher capital requirements.
"For example, the NCUA should consider changes to the characteristics of contributed capital accounts that would facilitate a transition," the report stated. "Most important, the task force recommends that elements of the share guarantee program be extended while the corporates' legacy assets remain an issue."
NCUA General Counsel Robert Fenner responded to the criticism during a discussion at GAC, repeating what NCUA representatives have said several times before in town hall meetings: The agency isn't seeking to design the shape of the corporate credit union system; it wants to set stronger rules for whatever system credit unions want.
While much of the report's criticism of proposed NCUA rules have been objected to by others already, the task force repeated CUNA's recent calls for a concrete plan to deal with so-called "legacy assets," the impaired mortgage-backed securities responsible for most corporate losses.
Two corporate credit union executives who represent institutions that haven't suffered significant security impairments objected to the report, saying the radical changes the report recommends don't represent their corporates.
Leigh Philibosian, senior vice president of marketing for the Mid-Atlantic Corporate Federal Credit Union, said her team believes the corporate business model is still viable, and the Middletown, Pa.-based corporate has been working with members for months on a strategic plan to move forward.
Furthermore, Mid-Atlantic's plan doesn't even require members to pony up new capital dollars. Instead, if members convert member capital accounts to Tier 1 capital accounts, Mid-Atlantic will be in a strong position to meet NCUA's proposed corporate capital requirements. Mid-Atlantic did lose all of its retained earnings and must rebuild retained earnings to meet those proposed regulations, but Philibosian said member feedback has been positive and leaders are confident the corporate is up to the challenge.
Thomas Bonds, president/CEO of Corporate America Credit Union, said the task force made "unsupportable, irresponsible broad generalizations," and the report doesn't represent the reality at his corporate, either.
The problem isn't the corporate business model, Bonds said, but rather the investment decisions made by some corporates.
"Since many non-corporate repositories of excess funds experienced fates similar to many of the corporates, there doesn't appear to be a nexus between the business model of corporate credit unions and natural-person credit union losses on investments," Bonds said.
If the task force wishes to avoid similar losses in the future, Bonds said the report's focus should be on the difference between decisions made at corporates that caused their members to lose money and those that did not.
Bonds also pointed out that his members already contributed new capital to his $2.2 billion institution, increasing Tier 1 capital from $17 million to $70 million in one year, much of it new funds. Member confidence that leads to PIC investments are based on strategic decision making, not business model issues, he said.