WASHINGTON — Judging by the NCUA's laundry list of potential regulatory, operational and organizational changes facing corporate credit unions, the $1 billion U.S. Central bailout and massive temporary guarantee of all corporate shares is no get-out-of-jail-free card.
In fact, the capital injection and resulting insurance premium levied on natural person credit unions could ultimately mean the end of U.S. Central, clip large corporate wings and force new regulations upon small corporates who haven't suffered losses.
Is it an overreaction? NCUA Chairman Michael Fryzel defended the wide-reaching, 17-page advance notice of proposed rulemaking and request for comment, saying a corporate restructure has been on his to-do list since his appointment.
“I felt it hadn't been looked at in a long time, so I had my staff put together a study related to the corporate system,” he said of the project, which began last fall. That study was shared with Price Waterhouse and the NCUA Board, he said, and used along with Price Waterhouse's suggestions to draft the ANPR.
“We started this process awhile ago, and now we're saying to the credit union industry, 'tell us how it should be restructured, tell us what you need your corporate system to be,'” he said. “From this day forward, we want to put a corporate system into place that will serve the industry for years to come.”
While he said his top two priorities are protecting corporate capital against current and future losses and helping natural person credit unions meet the NCUSIF premium assessment requirement, Fryzel said he is nonetheless confident that sweeping changes to the corporate network are appropriate and necessary.
Brad Miller, executive director of the Association of Corporate Credit Unions, said he expected some regulatory changes for corporates but was a bit surprised at the wide range of topics covered in the ANPR. However, given the restructuring financial markets are undergoing around the world, Miller said it wasn't completely shocking.
Though the corporate lobbyist said he wasn't aware that the NCUA was evaluating corporates for an overhaul study, he remained positive that Fryzel would consider industry suggestions and alternatives. He added that the industry spotlight isn't necessarily a bad place to be.
“Up to this point, there really hasn't been an opportunity for the system to collaborate on ways to address the current issues we're dealing with,” Miller said. “I feel that this expansive and expensive ANPR, which goes well beyond modifications to 704 regs, is the desire of the agency to ensure a healthy, vibrant corporate system for the credit union industry, and they've presented an opportunity to give input toward that end.”
The document lists six broad areas open for industry comment, due March 29: the role of corporates in the credit union system, corporate capital, permissible investments, credit risk management, asset-liability management and corporate governance.
CUNA's eight-member corporate credit union task force met in Washington the last week of January.
One topic corporates are surely mounting a defense against is the NCUA's suggestion to limit them to payment system services only, though the ANPR questions if such a business model would break even. Another suggestion is to offer two separate corporate charters, one payment systems only and another that would also allow the offering of term and structured investment services. Separate capital reserves could be required for the two.
Credit unions are also being asked to decide whether liquidity is a core corporate service, questioning whether products and services should be limited in order to protect liquidity and second guessing cash flow duration limits. Field of membership was mentioned as well, suggesting corporates might return to state or regionally defined FOM boundaries.
Investment authorities and vehicles are also under review. The NCUA is considering whether to prohibit investments that can become troublesome, like collateralized debt obligations, net interest margin securities, and subprime and Alt-A asset-backed securities.
Much of the ANPR document was devoted to capital adjustments. The NCUA suggested bringing corporate capital requirements in line with FDIC regulations. Options include excluding membership capital as a component of regulatory capital, increasing the required net worth ratio to more than 4% and using risk-weighted asset classifications when determining capital ratios.
Regarding membership capital, another possible tweak is to eliminate the adjustment feature, which would allow membership capital to meet Tier Two capital definitions, improving ratios.
Fryzel's corporate plan also includes a thorough re-valuation of corporate investment portfolios by account management firm PIMCO. The chairman defended his decision to hire the Newport Beach, Calif.-based firm, saying he needs an independent source. When asked how much the PIMCO audit will cost, Fryzel declined to reveal the details of the contract, citing confidentiality.
–handerson@cutimes.com

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