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In October, the NCUA Board approved final revisions to Part 704, the regulation that governs corporate credit unions. The major changes in the regulation are in the areas of capital, credit concentrations, and credit risk. From corporates’ perspective, the biggest accomplishments in the regulation include dramatic improvements in the following areas: * The restriction on a corporate’s ability to pay dividends if the earnings retention requirement falls below 2% has been eliminated from the final regulation. Instead, corporates will have to provide notification to their board, their supervisory committee, NCUA’s Office of Corporate Credit Unions (OCCU) and any applicable state regulator if the earnings retention requirement falls below 2%. * The effective date of the new definition of paid-in-capital has been delayed until July 1, 2003. This affords corporates the opportunity to issue 20-year maturity PIC if they so desire. * Section 704.12, “Permissible Services,” has been amended to allow a state chartered corporate credit to submit a waiver to the OCCU Director rather than apply to the NCUA Board to engage in certain services. The new rule also allows corporates to purchase securities with lower credit ratings than previously permitted. Some have questioned the agency’s decision to afford certain corporates the ability to invest 25% of their capital in BBB (flat) rated securities. The seminal point that has been omitted in the discussion is that such ability is limited to those corporates who have applied for and received “Part II” level authority under the regulation. Achievement of such authority occurs only when a corporate has demonstrated the necessary infrastructure, modeling tools, and staff expertise to effectively manage the additional investment risk posed by lower rated instruments. Currently, only three corporates have such authority and all three receive regular onsite supervision from the capital market specialists at NCUA. Corporate credit unions have been required to measure credit risks, independently of the very restrictive limit of investments to the highest ratings. The credit risk review is required prior to investment, during the life of the investment and at the time a security is sold or matures. The requirement has been augmented by on going ALM modeling requirements that bring into play the market volatility of all assets and liabilities held by the individual corporate. The ALM modeling effectively measures how much capital would remain under a liquidation scenario under various stress tests. While the focus on the discussion has been on a corporate’s authority to invest in BBB flat fixed income securities, the reality is that the risk measures that are in place mandate that these securities place minimal quantitative risk to the capital of the corporate. Moreover, while the new rule certainly does allow corporates to purchase securities with lower credit ratings, the new rule also establishes a general concentration limit of 50% of capital or a de minimus limit of $5 million (whichever is greater) for the aggregate of all investments in any single obligor. This too has been omitted from assertions that corporates can now make “riskier” investments. Interestingly enough, the aggregate corporate network exposure to an unsecured obligor is actually reduced by approximately $2.5 billion as a result of this new general concentration limit. Through the entire rulemaking process, corporates maintained that such a limit would actually be more restrictive than the prior regulation. Single obligor limits under the previous rule were limited to 100% of RUDE and PIC. While ACCU wholeheartedly supported NCUA’s decision not to set concentration limits depending upon a nationally recognized statistical rating agency’s credit rating of an investment, corporates urged NCUA to allow corporates to invest up to 100% of capital in AAA rated investments on the basis that the chance of loss in an AAA rated investment is negligible. ACCU believes that fears regarding corporates’ ability to engage in more “uncertain” investments under the new regulation are unfounded. Under the new rule corporates are still limited to very high quality instruments by a minimum credit rating of AA- compared to the AAA or AA under the previous rule. The new rule does not, however, so loosen credit quality standards as to jeopardize the safety and soundness of the corporate credit union system. Rather, ACCU commends NCUA’s deliberative approach to the revisions to Part 704. The opportunities to provide comment and engage in dialogue on key sections of the regulation were crucial in developing the final rule. The rule effectively recognizes corporates’ unique role within the credit union system while affording them the flexibility to provide services to their member credit unions and maintaining a strong corporate network. The corporate network is very proud of the safety and soundness for which it is known. This reputation as a proper investment provider for natural person credit unions has grown over the years through the healthy debate between the regulated and the regulator. The ACCU will continue to strive for adequate regulations that do not restrict the Corporate Credit Union Network to a position of non-responsiveness for its natural person credit union members.

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