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WASHINGTON-While CUNA Chief Economist Bill Hampel explained that there is nothing earth shattering in NCUA’s new investment regulation, he added that that was because there is little the agency can do within the narrow scope of the law. “There are pretty firm restrictions on what a federal credit union is allowed to invest in in the [Federal Credit Union] act,” Hampel noted. Federal credit unions currently are limited to government securities and federally insured financial institutions. The investment rule approved unanimously at NCUA’s May board meeting does permit all federal credit unions to purchase options to provide equity-linked dividends for members. It also allows RegFlex eligible credit unions to purchase Commercial Mortgage Related Securities up to 50% of the federal credit union’s net worth. RegFlex eligible credit unions are also exempt from the 100% of net worth cap for delegating discretionary control over purchase and sale of investments to a third-party provider and are exempt from the prohibition on purchasing securities with maturities exceeding the maturity of the borrowing repurchase transaction up to 100% of net worth. The new regulation, which becomes effective 30 days after publication in the Federal Register, expected last week, also promotes the pilot program series and streamlines procedures. According to Hampel, the Financial Services Regulatory Relief Act of 2003 (H.R. 1375) would allow credit unions to invest in highly-rated corporate debt securities, including commercial paper, some shorter term corporate notes, and asset-backed securities. These types of investments pay slightly higher returns than government investments, Hampel explained. “If you can pick up a quarter to a half point on an investment yield.it just gives them a little more flexibility, a little more power,” he said. Banks already participated in these types of investments up to 40%, according to the credit union economist. The current language of the bill would allow credit unions to invest no more than 10% of assets in these. H.R. 1375 currently reads, “In no event may the total amount of investment securities of any single obligor or maker held by a Federal credit union for the credit union’s own account exceed at any time an amount equal to 10 percent of the net worth of the credit union.” Additionally, aggregate investment securities held by a federal credit union for the credit union’s own account cannot exceed 10% of assets. Hampel speculated that Congress might be thinking it should ease into the new powers slowly, so credit unions’ “can’t bet the ranch.” “[F]or a few credit unions 10% may be constraining,” Hampel commented. Between the NCUA regulation and the regulatory relief bill, if it passes as is, he said, “Taken together, the two of these do most of [what CUNA members want]. If we had our druthers we’d probably do away with the 10%, but this is a carefully balanced piece.” He added that the bill is written broadly enough to permit NCUA to allow credit unions to get involved in further investments including some that may not have been created yet. Non-profit philosophical concerns could come into play, Hampel observed. For example, he said, some credit unions may object to getting into the commercial paper market, which helps finance many credit union competitors and includes a significant portion of auto lenders. Also, many asset-backed securities are simply pooled car loans. The legislation would also provide NCUA with the authority to further define `investment security’ and permit NCUA to determine the level of investment grade securities a federal credit union may hold for its own account. The reg relief bill defines `investment grade’ as “an investment security that at the time of such purchase is rate in one of the 4 highest rating categories by at least 1 nationally recognized statistical rating organization.” If the regulatory relief bill passes as is, NCUA would have the ability to approve more derivatives for credit unions to use in hedging. More good news is that as administrations change, NCUA’s policy on these investments, if granted, should not change much. Hampel explained that these changes would be to basic rules of operation providing alternatives for greater safety and soundness that may be altered on the fringes but are not public policy and should not change drastically with various political philosophies. [email protected]

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