The approximately 250 comments posted on the NCUA's Web site as of press time regarding a corporate credit union restructuring represent viewpoints so varied they're difficult to group into a majority. However, one trend was clear: opinions were relative to a CU's asset class.
Small to midsize credit unions stressed the importance of corporates in their operations, while large credit unions had harsher words for corporates. Many in the billion-dollar club called for regional consolidation and even the elimination of the entire network, as proposed by Cutler Dawson, president/CEO of the $36 billion Navy Federal Credit Union.
Dawson said most larger credit unions, including Navy Federal, don't need corporate services.
“Additionally, there are many competitively priced alternatives for investments, payment systems and liquidity management readily available to smaller credit unions,” he wrote in his Merrifield, Va.-based credit union's comments. According to the NCUA, Navy Federal's was one comment out of 433 total comment letters received by the deadline.
Yes, small credit unions could obtain corporate services elsewhere, wrote Steven Knudsen of the Independence, Mo.-based City Credit Union, but they don't get economy of scale along with it. And volume pricing isn't the only thing credit unions gain.
“Speaking as a president of a $21 million credit union, I am the CEO, CFO, CIO, the janitor, the collector, a part-time teller, a part-time loan officer, compliance officer and secretary. There may not be enough left to also take on investment specialist, payment systems expert and…ACH processing,” Knudsen wrote.
The $5 billion American Airlines Federal Credit Union was open to keeping the corporate system, saying corporates “have been an important provider of diverse services to many credit unions and an important group of institutions that should be maintained,” wrote to Eli Vazquez, senior vice president and chief financial officer of the Dallas-based institution.
However, Vazquez also advocated “a lesser number of larger corporates,” an idea submitted by many natural person credit unions and large corporates. Vazquez reasoned fewer corporates would increase economies of scale, generate more noninterest income, which would “reduce reliance on investment income and the associated incentive to make riskier investments,” and improve NCUA oversight.
In the event of corporate consolidation, ideas called for regions that mirror the NCUA's, or a Federal Reserve-type system with one central institution and smaller regional offices. However, small corporates argued they don't need restructuring.
“Today's crisis was not caused by the three-tiered system; it was precipitated by the use of highly expanded investment authorities in an environment of increased rate competition,” wrote Louisiana Corporate Credit Union President/CEO David Savoie. “Eliminating healthy corporates with proven ability to serve their members and operate soundly would not add a penny to the network's total equity.”
Additionally, Savoie wrote, “there remains no persuasive empirical evidence that economies of scale benefiting credit unions were achieved through consolidations.”
A major restructure for U.S. Central seems likely if the NCUA follows ANPR advice. Even Members United Corporate Federal Credit Union, led by CEO Joe Herbst, who was dismissed as the U.S. Central Board chair at the time of the conservatorship, wrote that many functions are replicated at both corporate tiers, and given all the challenges facing credit unions, capital accumulation at both tiers “is not feasible.”
However, Members United and Southwest Corporate Federal Credit Union, led by President/CEO and dismissed U.S. Central Supervisory Committee Member John Cassidy, recommended what many other corporate and natural person credit unions did as well: gradually replacing U.S. Central with a central corporate CUSO that would provide off-balance sheet products and services.
VACORP Federal Credit Union summed up a common complaint about U.S. Central when it said the wholesale corporate assumes a disproportionately large share of credit risk, but has the least capital.
“Transitioning U.S. Central's role to off-balance sheet activities and as aggregator payment-related functions” would “realign risk and capital back to individual corporates,” wrote VACORP President/CEO and dismissed U.S. Central Board Member Jim Hansen.
While most credit unions support increased capital requirements for corporates, from 4% to as high as 8% for those with expanded investment authorities, opinions regarding expanded investment authorities varied greatly, not showing many similarities according to institution size.
The $2.6 billion ENT Federal Credit Union of Colorado Springs, Colo. called for the NCUA Board to at least temporarily suspend previously approved upper level investment authorities, with President/CEO Charles Emmer commenting, “Frankly, practices that got us here should be stopped until we develop and implement a prescription.”
Kelly McDonough, president/CEO of the $100 million First Alliance Credit Union of Rochester, Minn., wrote that despite the argument that corporates only purchased highly rated securities with well-defined risk, “that clearly has not protected member credit unions from unprecedented losses.”
From Santa Ana, Calif., Rudy Hanley, president/CEO of the $7.75 billion SchoolsFirst Federal Credit Union, wrote that he prefers risked-based capital and a capital leverage ratio to control risk rather than limiting current corporate investment authorities.
Warren Nakamura, president/CEO of the $215 million Honolulu Federal Credit Union, is a former WesCorp Board member and was chair of the board of Pacific Corporate Federal Credit Union when it merged with WesCorp in 2003. Nakamura's comments on behalf of Honolulu FCU defended expanded investment authorities, specifically those of U.S. Central and WesCorp, saying, “I believe if the $61 billion in assets of U.S. Central and WesCorp were invested by natural person credit unions and corporates, the loss to capital throughout the system would be even greater.”
Retaining the high yields corporates offer to their members was Nakamura's most important issue. He said he earns “about 6 basis points above agency securities” at two corporates, where he's parked more than 90% of his investable funds.
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