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<p>By PAUL GENTILE CU Times Editor WASHINGTON – In comment letters to NCUA on its proposed revision of the corporate reg, Part 704, both the Association of Corporate Credit Unions and NAFCU objected to the proposed 2% minimum RUDE ratio. ACCU cited three reasons for its objection: it is inconsistent with other financial institution regulatory schemes; it believes that 2% is arbitrary and has not been proven to be an appropriate determination of capital adequacy in addition to existing regulatory capital requirements; and it believes a credit-risk weighted capital standard is more sustainable to evaluate a corporate’s capital position in relation to risk. “ACCU believes that a corporate’s risk profile as measured by its activities and capital position is a better determinate of its risk than a minimum RUDE ratio requirement,” stated the ACCU. The ACCU hammered home the point that corporates are masters of managing capital, and with their role as both a provider and absorber of liquidity for CUs, they need some flexibility and not be stricken with the 2% minimum RUDE ratio. In its letter, the ACCU gave specific historical examples of how in the last two years with liquidity going from very low to very high in the system, corporates have managed capital efficiently. Corporate overnight deposits fluctuated from $23.6 billion in August 2000 to $50.3 billion in March 2001. Over the past year corporates’ RUDE to daily average net asset ratio fluctuated from 1.74% (which would be below NCUA’s 2% proposal) to 5.84%. ACCU said that the corporates that have fallen below 2% RUDE, still maintain overall capital of over 4%. “It is unclear why the agency would control corporates’ growth and force credit unions to place deposits in other institutions or instruments over which NCUA has no regulatory oversight simply for the sake of capital measures,” stated ACCU. The ACCU also disagreed with NCUA’s assertion that the minimum ratio would provide a core capital level comparable to other financial institutions. Any definition of core capital should include both RUDE and PIC, said ACCU. “No other financial regulatory scheme defines core capital as just RUDE. Rather, other regulators include common stock and noncumulative perpetual preferred stock in the determination of core capital. ACCU believes that the regulation must recognize PIC as primary, core capital.” In its letter NAFCU said the minimum “creates problems where no problem exists.” “Dipping below the minimum RUDE ratio does not necessarily signify weak capitalization. On the contrary, a corporate below the minimum RUDE ratio may be well capitalized using other measurements,” wrote NAFCU President/CEO Fred Becker in the comment letter. NAFCU also raised the issue of the RUDE requirement being risky to the credit union system as a whole. It portrayed a scenario where an increase in liquidity could trigger a mandatory capital restoration plan in a corporate. NAFCU said the plan might cause a corporate to stop accepting deposits, decrease rates and/or push the excess liquidity out of the corporate and back to its members. “Rapidly building GAAP retained earnings is very difficult in any situation, because corporates operate at low margins. It would be even more difficult in a situation where these events, separately or collectively, weakened credit union confidence in a corporate and the corporate system,” wrote Becker. The ACCU did commend the board for counting Member Capital Shares, PIC, and RUDE as capital for purposes of credit concentration and interest risk limitations; calling the move “enlightened.” However it opposes some of the proposal’s membership capital requirements, specifically extending MCS past three years and a monthly amortization of MCS when a MCA account has been placed on notice or has a remaining maturity of three years. “Corporates have only issued MCS as three-year notice accounts. To date, none have issued longer term MCS accounts. Even if corporates choose to issue longer term MCS accounts, the criteria for amortization should include both placing the account on notice and the remaining three-year maturity of the account,” stated ACCU. The ACCU went on to suggest that the section should be reworded to read “and has a remaining maturity of less than three years.” [email protected]</p>

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