WASHINGTON — A day after approving a stabilization fund for corporate credit unions, members of a congressional subcommittee asked Chairman Michael Fryzel why the NCUA hadn't done more to prevent the multibillion-dollar crisis facing credit unions.
Rep. Luis Gutierrez (D-Ill.) said the agency's conservatorship of U.S. Central Federal Credit Union and Western Corporate Federal Credit Union seemed to indicate that the agency had allowed them to make high-risk investments, mostly in mortgage-backed securities.
Fryzel said that when the investments were initially made by the corporates-and reviewed by the NCUA-they were thought to be sound investments. He later said that “corporates need to do a bit more due diligence.”
In response to the hearing, Kevin Brauer, Members United's executive vice president of member relations/president of the northeast region, countered, “In complying with the corporate regulation, Members United utilized ratings as a key metric, but not the only metric, to evaluate investment securities. The Members United investment and risk staff review rating agency comments, analysis from other providers (brokers, analysts and industry sources), internal modeling, historical performance of asset types and forward-looking reviews by industry experts.”
Gutierrez, who chairs the House Subcommittee on Financial Institutions and Consumer Credit that held the hearing last Wednesday, praised the work of credit unions but said Congress needed to help the NCUA take sufficient precautions to ensure that there isn't a similar problem.
Rep. Brad Sherman (D-Calif.) started to ask Fryzel why the NCUA didn't discover the problems of U.S. Central and WesCorp earlier but ran out of time, and Fryzel never had to respond.
Rep. Randy Neugebauer (R-Texas) said that Congress needs to fully study the actions of existing regulators before adding another layer of financial regulation, describing some as “asleep at the switch.”
Fryzel called Congress a “very responsible partner” in dealing with the problems facing corporates and promised to “put the hard lessons we have learned to good use.”
He didn't spell out specific remedies during his testimony, but in his prepared remarks he outlined a series of rule proposals that the agency will release later this year to more closely regulate the capital requirements of corporates.
According to the written testimony, corporate credit unions would have to keep a 5% core capital leverage ratio (including a certain percentage of retained earnings) to be considered well-capitalized. He said his agency would require that a “significant amount” of a corporate's core capital consist of retained earnings. The rule will also include risk-weighted capital standards and require that all capital instruments qualify as Tier 1 or Tier 2 capital.
To this, Members United's Brauer stated, “Higher capital levels would provide corporates with greater flexibility to either sell securities at a loss when liquidity is needed, or to hold securities that cannot be sold for a fair value like in today's environment. Higher capital levels will also help the corporates retain higher ratings, preserving member balances and allowing access to external sources of liquidity to meet natural person credit union needs.”
The proposal would also eliminate distinctions between wholesale and retail corporates but keep national fields of membership in place. He wrote that the agency would also change the rules for directors of the corporates to include minimum qualifications for board members and transparency of compensation arrangements for senior managers.
During his testimony, NASCUS Chairman George Reynolds said federal regulators need to be more transparent with state regulators about the health of corporate credit unions and said both kinds of regulators should conduct more joint examinations of state-chartered corporates. He also urged the NCUA's inspector general to conduct an examination on the agency's handling of the events up to and during the conservatorships of U.S. Central and WesCorp.
Greg Moore, president/CEO of Georgia Central Credit Union, said following the hearing that it was a good step toward educating Congress on the issues within the corporate credit union system. Moore applauded Reynolds' remarks, stating, “We agree with Mr. Reynolds about the importance of Congress understanding the variations among corporates (including the fact that some, like Georgia Central, don't own private-label asset-backed securities) so these lawmakers will not entertain the misperception that more corporates will likely be taken into conservatorship or that additional losses are likely.”
Testifying on behalf of NAFCU, Jim Bedinger, chief operations officer for Chicago Patrolmen's Federal Credit Union, reiterated NAFCU's call for separating the risk of insuring corporate and natural person credit unions and creating a “permanent buffer” between the two. He also called for Congress to allow the CLF to directly help the corporate system.
Bill Lavage, president/CEO of Service First Federal Credit Union of Danville, Pa., criticized the NCUA's handling of the corporate credit union woes. On behalf of CUNA, he took aim at “the opaqueness of their process and an apparent lack of creativity in seeking ways to manage what has become the largest single shock ever to the share insurance fund.”
An hour after the hearing ended, President Obama signed legislation that included provisions to create a stabilization fund for corporate credit unions, which was lauded by the Association of Corporate Credit Unions' Executive Director Brad Miller.
The fund allows the NCUA to borrow funds from the Treasury to be paid back over seven years, while natural person credit unions would pay the additional premium to the NCUSIF over that time period. The NCUA has estimated that shoring up the corporates could cost credit unions an assessment of between eight and 20 basis points a year over seven years.
–cmarx@cutimes.com
Correspondent Heather Anderson contributed to this article.

Instant Insights /

Fryzel Uses Grilling by House Panel To Serve Up Corporate Proposals

Related Stories

Recommended For You