Is the NCUA Clueless? Or Is It Seeking to Kill Off the Corporates?
Does everyone feel they had their say regarding the NCUA's proposed rules for corporate credit unions? If you didn't join your several hundred colleagues in writing in, then you are no longer allowed to complain. The NCUA allowed for open discussion in its town halls and the comment process was open to anyone. This is where the agency has been transparent.
The thrust of the corporate proposal is the capital ratios it would require for corporate credit unions to be adequately capitalized a 4% leverage ratio, a Tier 1 risk-based capital ratio of 4% and total risk-based capital ratio of 8%. This part of the proposal mirrors Basel and that is good and logical. Hopefully, a similar risk-based capital system can be applied to natural person credit unions one day in the near term.
However, achieving these in a one-year time frame would be Herculean, if not impossible by most accounts. While the NCUA has said it could be flexible with the one-year time frame if a corporate was heading in the right direction, the near impossibility of these requirements-as consistently pointed out in the comment letters and at the town halls-calls into question the NCUA's credibility. The proposal leads to one of two conclusions: Either the NCUA is out of touch with how the institutions they regulate run, or the NCUA is looking to shut down nearly all, if not all, the corporates.
Additionally, regulatory items such as penalties for early withdrawals on corporate certificates would force credit unions to look outside the system for services.
For the agency to take that route would be a mistake. Several small credit unions have said the current proposal will cost them more for necessary services such as ACH, wires, Check 21, liquidity, and others. Even the $450 million Community Choice CU in Michigan said that CenCorp saved the credit union $105,000 over other providers for the services it uses every year.
While some of the policies that drove the corporate credit union crisis where it is today, such as the lack of risk-concentration thresholds, the agency must be cautious not to go too far the other direction. Clearly, when the NCUA wrote the corporate credit unions in April 2007 that, "as of Dec. 31, 2006, system-wide corporate credit union exposure to securities collateralized by real estate totaled 75.34% of all marketable securities," it began to see that problem.
The other thing that everyone needs to keep in mind is that U.S. Central, WesCorp and others made poor business decisions. The financial decline of many of the other corporates and natural person credit unions was a symptom of the interdependency of the system. If the credit union movement is to remain cooperative, that is the risk you take in being part of it, but do not mistake the cooperative model for the cause. The cause was bad decisions made at a handful of key institutions.
Asset concentration risk is a must for the regulation. NCUA Chairman Debbie Matz was overruled by her follow board members, trade associations and some of the very corporates that go into trouble at the last go 'round about including concentration risk in the regulation. We all know where that ended up. As regulators know and can become unpopular for, they have to regulate all to weed out the bad. And still, corporates considered well-capitalized would be permitted to borrow for nonliquidity purposes, so there is evidence of the agency making exceptions for the better run institutions.
In part to mitigate the risk of another meltdown, the NCUA has proposed only C-suite executives be permitted to serve on corporate credit union boards. As Glendale Area Schools FCU CEO Stuart Perlitsh, who is suing WesCorp, has pointed out, that didn't go so well at WesCorp. Instead, Perlitsh has suggested that corporate boards come from well-run institutions, such as those with CAMEL 1 or 2 ratings. San Mateo Credit Union has suggested that it rely on core competencies and training. Either of these is better than limiting by title; that would be roughly equivalent to relying too heavily on ratings agency rankings. A label doesn't make one qualified.
The NCUA is also looking for transparency of executive and board member compensation at the corporates. I have no problem with this; as nonprofits, top-tier executives' pay should be disclosed. At the same time, the agency could use a little sunlight as well. When the NCUA was initially looking at the corporate situation, it seemed to take no public action. The rumors and guesswork at the time only made the situation worse. Credit unions should have been informed early and often as to what the agency was doing to stem the oncoming crisis. Better yet, several economists and investors at various credit unions saw the housing crisis coming and ran the other way; the NCUA should have had someone on staff qualified to make that call.
Next, the agency must decide what it will do with the toxic assets it's left holding before anything moves forward with the corporates. Whatever is decided should not only take into account the least-cost scenario for the NCUSIF, but also for the federally insured credit unions that will be paying the tab one way or another. Deposit insurance isn't serving its purpose if it's only there to shore up itself. The NCUA must work to save as many viable credit unions as it can. This is not cheerleading; it's good oversight. The same applies to the corporates.
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