ALEXANDRIA, Va.-NCUA recently posted its new investment and asset liability management (ALM) review procedures on its Web site at www.ncua.gov. The new Interest Rate Risk Questionnaire, which explains the procedures examiners will follow and replaces the old Asset Liability Review Questionnaire, and the new Liquidity Questionnaire outline the procedures for examiners to assess liquidity risk. Both became effective March 25. While NCUA officials say the pilot programs for the new questionnaires went smoothly with few, if any complaints from the sample credit unions, the procedures caught the eye of Peter Duffy, senior vice president of Investments with First Empire Securities, Inc. He described the new liquidity questionnaire as "overkill" and that credit unions are being "treated like kids in a marketplace of adults." "I think [NCUA is] conservative and just incredibly over detailed in the management of credit unions for what they do for a living. These people manage cash flow for a living," Daffy said. While it may be true that credit union officials perform these duties for a living, an informed source at NCUA requesting to remain anonymous said, the agency does have reasoning behind its examination. The source said that while credit union officials may handle cash flow daily, NCUA does need to make sure it is done properly. While some of the information asked for in the questionnaire seems basic, it is not always addressed by the credit unions, the NCUA official said. NCUA is not only the credit union regulator, but also the insurer of funds. The source added that NCUA created its new questionnaires after first reviewing those of the other federal financial institution regulators and did not deviate significantly from them. "Our goal at NCUA is just to make sure a credit union is prudently following management practices, not that we can go in and do it better," the source said. He added that the new risk-based philosophy at the agency is making the interest rate risk and liquidity examination process even shorter for credit unions that handle it well. If the examiner enters the institution and sees everything is in order, this part of the examination will be limited and take just a few hours. However, if something is missing or a credit union is expanding into a new area, a general or even a detailed examination may be in order. The agency is also making efforts to better educate examiners and will soon introduce a new level of examiners, specific to subject matter, which will help make the process even more streamlined. NAFCU Economist Tun Wai said that he did see "some merit" to the criticism to the agency, but that the agency needs to know more details about a credit union's plans than just a simple check mark showing they have appropriate policies in place. "One of the things you have to understand is instead of telling them how to run the institution, they want to be sure.the process is there, there is a procedure in place," he said. He added that NCUA needs to set a minimum standard for some credit unions, while many others already do these things on their own. TCT Federal Credit Union (NY) CEO Kurt Cecala, a client of Duffy's, said that he does not feel he is being micromanaged by NCUA. However, "I would definitely say NCUA has concerns in certain areas that I'm not that concerned about, but I can see where a regulator would have concerns." TCT is a $50 million federal credit union with a 7% capital ratio that has recently begun shifting its investments more toward collateralized mortgage obligations (CMOs) and mortgage backed securities (MBSs). "The key is understanding the whole balance sheet," he said. Wai agreed with that statement, but on the more conservative side. "You don't look at an investment because it has a higher return because it has a risk involved. It depends on the situation," he commented. "In reality, by staying short you are able to invest in things that are going to return more." Even though shorter-term investments offer lower returns they can be moved around more easily for higher term items, like a mortgage. But this is at the heart of another criticism Duffy has of the NCUA: they are far too conservative in the investment arena. Credit union investment portfolios should go for more long-term items like CMOs and MBSs, similar to a community bank's portfolio. He charges that following the CapCorp incident in 1995, credit unions are scared to enter into these types of investments. CapCorp was heavily invested in CMOs and MBSs that ultimately led NCUA to liquidate the credit union. While Duffy admits that CapCorp did have a bad investment portfolio, if NCUA had not liquidated it, the credit union could have rode out the storm and not incurred the losses it did. Since then, credit unions have been slow to diversify, but those who have are happy, according to Duffy. Cecala said that TCT has made the shift to be able to better serve its members. He said that he hoped NCUA would be open to more dialogue on the subject moving forward. Tom Reimholz, CEO of Abbott Laboratory Employees Credit Union (Ill.), another client of Duffy's, also recently began diversifying its investment portfolio. The $250 million credit union is state chartered and privately insured, so it does not have NCUA to contend with. However, Reimholz said, "While it isn't in lockstep with NCUA, we are held to pretty much the same standards." He remarked that the state is probably slightly more liberal. Abbott Labs has 53% of its portfolio in federal agencies, yielding an average of 5.5%. It also has 39% in overnights and cash equivalents, and a smattering of investments in stock and stock option loans, real estate, and a small CUSO investment. According to data from First Empire Securities, the average credit union has about 55.15% of investments in cash and only 27% in agencies. According to the same data, the average credit union investment portfolio yield is 4.88%. While Abbott Labs is not quite at that rate, its yield did increase from 4.09% in 2000 to 4.63% in 2001 for just the first full year after working with Duffy. "I would challenge that we would be able to do what we've done under an NCUA charter," said Abbott. From what he has heard from talking to colleagues, he said, is that the agency has "unyielding tunnel vision." However, an NCUA official said that it is not the agency, but credit unions themselves keeping their investment portfolios short. In the current uncertain marketplace, many credit union members have chosen to keep their money at their local credit union rather than the stock market. The influx is not expected to last and those funds will soon be flowing out and credit unions need to be prepared. They can get at their funds easier in short term investments, the official said. Additionally, "many credit unions see their bread and butter as loans." He added that investments greater than three years do carry additional reporting requirements, but that should not be keeping credit unions from going long with their investments. NAFCU's Wai agreed that credit unions might be keeping themselves short. "It's the conservative manner in which credit unions operate," he said. But Duffy argues that credit unions are going to become less and less competitive as time wears on. As of year-end 2001, the credit union community's average yield is 4.88% while small banks yielded 6.17%, according to data from First Empire. "It's a Chinese water torture over time sort of thing, which is why NCUA is able to get away with this, because it's not so obvious," he said. To Duffy, diversity is the key and banks have been structuring their portfolios in this manner for years without raising safety and soundness concerns. He said NCUA was so afraid of creating the next savings and loan crisis that it was hurting credit unions by discouraging longer-term portfolios. Wai pointed out that credit union competitors, mainly banks, have "more access in terms of instant cash availability" and might not have to be as concerned over liquidity. Duffy did emphasize that NCUA is not doing anything wrong. "It's never a problem of focusing on the right thing," he said. "It's just they're so onerous and laborious over everything." In the end, most agreed that investments and liquidity were an art and not a clear-cut science. Arguments could be made for shorter-term investing having greater interest rate sensitivity as well as longer-term investments. Also whether short-term investing is better for liquidity concerns. "There is no right and wrong.because the person who is making the decision is making it based on the outside-what's going on with the marketplace-but also what's on the inside," Wai said. It's a balancing act of pleasing your members and getting the most funds to serve them with. [email protected]