LENEXA, Kan. – While some corporates have concerns about the three-tiered system being affected, others welcome U.S. Central's new CD program. U.S. Central SVP of ALM Dave Dickens reported that in just a little over a week of having the proposal, six corporates have already signed on for its Transferable Certificate Program. While offered to CUs via corporates, the money invested by the credit unions is kept on U.S. Central's books not the corporate's. The CD carries a one year, $1 million minimum investment. Empire Corporate FCU President/CEO Joe Herbst said he has some concerns about the product. "I feel the three-tier system has served us well. The original roles we each play are very much as important today as when we set up the three-tier system. I think credit unions are best served through the relationship with corporates," said Herbst, who stressed that Empire is still evaluating the Transferable Certificate. Dickens said U.S. Central in no way wants to go around the three-tier system, in fact he said this product will only be successful using the three-tier system. VolCorp President/CEO Bruce Fahnestock said he doesn't see this as a threat to the three-tier system. "U.S. Central is being very careful to offer this to home base corporates. We can't even use U.S. Central to help market to our non members," said Fahnestock. Herbst also questioned if this product could cause liquidity problems if the overflowing liquidity trend turns around. "I just have to look at it and see if it is in the best interest of the credit unions. The fundamental flaw is I have to put up the capital when I don't have it on the balance sheet," said Herbst. Herbst is referring to corporates having to increase its Membership Capital Shares with U.S. Central as credit unions invest in the Transferable Certificate. Corporates have to deposit 5% in MCS in U.S. Central for the total amount invested by CUs. This is nothing new in that corporates pay the same 5% MCS for any deposits with U.S. Central. As corporates' deposits increase with U.S. Central, MCS increases, and as deposits decrease, MCS decreases, making it an "elastic" situation, said Dickens. He said most corporates have enough short-term deposits with U.S. Central, that any liquidity situation could be handled. "On average a corporate's deposits at U.S. Central are usually pretty short, half or more are in overnight. As these corporates become less liquid, these dollars flow back to corporates," said Dickens. Southeast Corporate FCU President/CEO Bill Birdwell questioned why an off-balance sheet product couldn't have been developed. "I believe that a credit union legal off-balance sheet product would be preferable for diversification, that blunts the perception of U.S. Central going direct to credit unions," said Birdwell. Dickens said Central has tried to do that with no success. "We have over the years looked at ways to do off-balance sheet products. All of those initiatives have not successfully produced a product that we and corporates thought was viable," said Dickens. Birdwell agreed with Herbst about the potential capital problems. "The more that goes in, the more capital ratios are going to decline at U.S. Central. Corporates, not credit unions, are the ones that have to fund that capital level. You're just not aligning the capital requirements with the capital provider. It's an interesting idea that could have been refined and improved," said Birdwell. The CD isn't for everyone, said Dickens, but it will help those CUs that won't invest any more in their corporate because of their own concentration limits. "We heard from big corporates and little corporates that have credit unions that needed an additional credit worthy counterparty. There are credit unions that regardless of size are maxxed out on the amount of money with that corporate," said Dickens. "Corporates pay really good rates and corporates have a very large market share of overnight money. Credit unions tend to put a credit limit on how much they'll put with counterparties. A lot don't have limits. It's not a universal problem," said Dickens. Fahnestock has seen some of his CU members hit the concentration limit. "This gives us an opportunity to add some diversification through our members who may be topped out on how much they can keep at VolCorp. I can now give them something that's from within the credit union system. And if they want it great, we pick up a little on it and it stays in the system," said Fahnestock. Jim Hansen, president/CEO of Virginia League Corporate also welcomes the program for its diversification benefits. "It would definitely be beneficial. One example is Navy (FCU). This will be a great way for us to attract a greater share of their investable funds. They're limited by what they can invest in us," said Hansen, who pointed out that diversification is more of an issue at larger CUs, not small CUs. Herbst on the other hand said among his members he's not hearing about diversity problems. "I don't think diversification is a big issue. Credit unions can join multiple corporates to diversify. The diversification option is available in the corporate marketplace." Mid-Atlantic Corporate FCU President/CEO Ed Fox, who is on the board of U.S. Central, said he's excited about the Transferable Certificate giving credit unions an alternative to agencies, where many CUs are investing. "And with many corporates approaching the 2% capital level, this is an off-balance sheet option," said Fox. Fox said corporates have a majority on U.S. Central's Board so corporates are protected. "I don't believe it is their intention to ever hurt us, but because we have a majority we should never have a situation where they could do that," said Fox, who doesn't think this product hurts the three-tier system. [email protected]

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