Will large credit unions, which can shop around for alternativesto corporate credit union services, invest capital as a conditionto access corporates?
According to some, particularly those on the West coast, the answeris a resounding “no.” Credit Union Times spoke with eight of thetop 20 natural person credit unions by asset size, and only twosaid their credit unions would participate in mandatory corporaterecapitalization. Furthermore, the “yes” responses were castbegrudgingly, both including the comment “if it's mandatory, do wehave a choice?”
All respondents said they are currently shopping the competition tolimit corporate exposure or have already taken their businesselsewhere.
Olympia, Wash.-based consultant Marvin Umholtz said of the creditunion CEOs who manage shops larger than $500 million, none he'sspoken to support corporate recapitalization. Credit unions of thatsize are large enough to shop around, he said.
If the $500 million and up club doesn't support a new corporatesystem, it could limit services provided to remaining credit unionsthat can't shop as easily outside the network. As of June 30, 348federally insured credit unions had $500 million or more in assets,and together represent $524 billion in assets, roughly 60%according to NCUA 5300 reports. Large credit unions also hold abouthalf of the industry's cash and equivalents and a little less thanhalf of total investments.
As recommended in the Sept. 2 CUNA/NAFCU Corporate Credit UnionRestructure Policy Task Force report, removing long-terminvestments from corporate balance sheets will significantly reducetheir asset size, and in turn, their capital requirements.
Mike Lussier, president/CEO of the $475 million Webster FirstFederal Credit Union, is co-chairman of the task force. He said hehad received positive response to the report, particularly therecommendation to significantly shrink balance sheets by removinglong-term investments.
“For us, the major issue was to find a way to ensure the burdenthat has fallen upon natural person credit unions won't happenagain,” Lussier said.
Lussier said the task force's recommendation to keep short-terminvestments available to corporates will allow them to fund paymentsystems programs.
This makes the prospect of corporate recapitalization morepalatable to Rick Heldebrant, president/CEO of the $4.8 billionStar One Credit Union, a Western Corporate Federal Credit Unionmember headquartered in Sunnyvale, Calif.
However, Heldebrant said the corporate brand is so damaged, even amuch smaller capital investment in WesCorp isn't an automatic “yes”for Star One.
“For me, part of it is that nobody has said what went wrong withthe corporates,” Heldebrant said. “The corporates say the NCUAoverreacted. The NCUA isn't saying anybody at the corporatesscrewed up or that they missed anything as regulator. So how cananyone say they will avoid this situation in the future?”
The Golden 1 Credit Union President/CEO Terry Halleck said thedecision to replenish member capital accounts at WesCorp will be atough one for its members.
“While many credit unions currently depend upon the valuableservices provided by WesCorp, and are highly supportive ofcollaboration in the industry, the ultimate fiduciaryresponsibility of a CEO and his or her board of directors is totheir individual credit union and its membership,” Halleck said.“Accordingly, I would anticipate each CEO would perform acost-benefit analysis as to the value their individual credit unionreceives from WesCorp versus alternative options in the market anddetermine if those benefits truly outweigh the financialconsiderations of placing additional equity funds in at risk membercapital accounts.”
Halleck said given a corporate's need to maintain a stable depositbase, mandatory capital calls would “seem imprudent” any time inthe near future.
If First Entertainment Credit Union's Charles Bruen could write hisown screenplay that determined how the corporate stabilizationdrama played out, the corporate credit union network and the NCUA'sCentral Liquidity Facility would explode in a giant, money-shotfireball.
To be fair, Bruen recommended a “phased shut down” of the emergencyliquidity enterprise, but he didn't mince words in voicing hisopposition to recapitalizing corporates and the CLF in an Aug. 31position statement.
Bruen said First Entertainment's board supports his publishedposition and feels exposure to corporate credit union and othershare insurance fund losses, inaccessibility to alternative capitalsources and outdated capital regulations, when combined with aprolonged recession, pose a threat to FECU's survival.
He said his $820 million institution has “zero intention” ofrecapitalizing corporates, and is developing plans to replaceservices currently provided by WesCorp should recapitalizationbecome mandatory.
He said he's sympathetic to small credit unions that rely uponcorporates but questioned the ability of “the severely woundedcorporate network” to provide much help to any credit union, largeor small.
Bruen suggested some larger natural person credit unions might stepforward to provide correspondent relationships for their colleagueswith fewer assets; however, he said First Entertainment has nointerest in pursuing that business.
Not only was the CLF never intended to be used to provide liquidityto corporates, but the U.S. Treasury has been critical of the CLFstructure since 1997, the Hollywood-based Bruen said. The NCUA'sJuly 31 CLF accounting changes are valid, but he charges the agencywas compelled to act by the Treasury.
“Think of the U.S. Treasury's Federal Financing Bank as serving inthe role as the NCUA's banker,” Bruen wrote. “It has a borrower-theCLF-that has a faulty business plan, mountains of debt (that iscertain to grow) and no real capital. Having a borrower in thosecircumstances would motivate most lenders to get very hands on. Itis not surprising that the U.S. Treasury has done so under thecircumstances.”
Bruen said he's concerned about the NCUA method of countingindustry capital, which he called “double counting.” He cited theTreasury's 1997 credit union study, which covered the issue.Although the Treasury concluded the NCUA is following properaccounting standards in treating the deposit as an asset ratherthan expensing it, the agency was critical of the practice.
“The Share Insurance Fund counts the 1% deposit in its reserves. Atthe same time, credit unions count the 1% deposit as an asset ontheir own books, which makes their reported net worth higher thanit would be than if they had expensed the deposit. This treatmentof the same dollars as reserves of the fund and as an asset ofcredit unions results in double counting if one views the fund andcredit unions' net worth as the total buffer available to absorbcredit union losses,” states the 1997 Treasury report.
Umholtz said double counting is an understatement. If naturalperson credit unions, retail corporates, U.S. Central and theNCUSIF are all counted as buffer levels, the correct term isquadruple counting.
“We've seen how this practice can produce a domino effect,” Umholtzsaid. “These days, the only real capital is sitting at naturalperson credit unions. Theoretically, corporates have had someretained earnings, but if you look at the whole corporate system,how much capital is really left? For all intents and purposes,corporates are undercapitalized.”
The structure creates a no-win situation for credit unions largeenough to shop around to limit their corporate capital exposurebecause any federally insured credit union that participates in theshare insurance fund is exposed to corporate risk.
At $40 billion, Navy Federal Credit Union is larger than anycorporate and doesn't use corporate services. However, therecipient of the industry's largest share insurance fund bill isstill exposed to corporate losses.
“We will be paying for [corporate losses] for the next seven years,and we don't want to be put in that position again in the future,”said Dennis Godfrey, Navy Fed's chief innovation officer.
Godfrey said he agreed with the joint task force's recommendationthat corporate deposit insurance be limited to that of naturalperson credit unions.
Umholtz said he thinks the corporate brand and business model isbeyond repair.
“Yes, there were outside forces involved, but corporates got caughtup in them, and I think they've cost the credit union industry morethan it's ever lost in its history, up to this time,” hesaid.
However, Lussier disagreed, saying he thinks even if large creditunions ditch the corporate system, there will still be
enough assets left to sustain the corp-
orate network.
“Larger credit unions really need to look at our plan asall-inclusive in order to work properly,” he said. “If it's appliedthat way, the amount of risk taken for those who choose toparticipate going forward will be minimal.”
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