NCUA regulation, not GAAP accounting standards, require corporate credit unions to eliminate retained deficits by impairing capital, said Scott Waite, member of Financial Accounting Standards Board's small business advisory committee.
Waite, who is also chief financial officer at the $4 billion Patelco Credit Union, said his peers have been asking him for months if such a requirement exists. It does not, he said, adding, “GAAP doesn't speak for capital, regulators do.”
The NCUA stated in its May 09-CU-10 Letter to Credit Unions that “Part 704 expressly requires PIC to be available to cover losses that exceed retained earnings,” and MCA to be “available to cover losses that exceed retained earnings and PIC.”
However, the NCUA muddied the waters by also stating in the letter that “the exhaustion of capital, which results from operation of a regulatory mandate (Part 704) to cover losses once a retained earnings deficit develops, is not synonymous with the determination by management of the investing credit union that its capital asset is impaired.”
Credit unions and their third-party CPAs should judge for themselves “whether their credit union's PIC and MCA are impaired as defined by GAAP,” the NCUA stated, and “whether the impairment is 'other-than-temporary,' thus warranting a charge against current period earnings.”
In other words, credit unions should use GAAP to decide if their investments have suffered permanent losses. But once those losses cause negative earnings to slip into deficit status, member-contributed capital must be used to eliminate it, according to Part 704 regulation.
Waite praised FASB Chairman Robert Herz's Dec. 8 comments that FASB will address ways to “decouple” financial regulators from accounting standards. GAAP accounting standards primarily aim to provide Wall Street investors with an apples-to-apples financial comparison, he said. But regulators have the flexibility to depart from GAAP, particularly when it comes to capital.
“Restraining capital makes it harder for institutions to lend,” Waite said, “and less capital means less lending, which means fewer retained earnings, which means a steeper road to replacing capital.”
That cycle isn't good for institutions, consumers or the economy, he said, and regulators exist to protect and foster those things.
The NCUA already gives leeway when it comes to accounting standards. For example, the agency uses Nov. 30, 2008, net worth ratios when reporting current corporate regulatory capital.
Higher capital requirements are a cornerstone of proposed NCUA corporate regulation. For corporates that hold asset-backed securities in their portfolios, each investment review and possible impairment threatens to distance them further from regulatory minimums.
Even corporates that still have member-contributed capital intact are following the issue. The $3.4 billion Mid-Atlantic Corporate Federal Credit Union has already written off all its U.S. Central capital and doesn't hold mortgage-backed securities, according to CEO Jay Murray.
“Fortunately, we don't need to go to members to ask for new money, we can convert existing capital accounts to PIC to make the Tier 1 requirement if necessary,” Murray said.
However, the Middleton, Pa.-based corporate has taken a retained earnings hit, and Murray said he's still crunching numbers to decide whether proposed corporate regulations provide for enough revenue to replace those earnings and meet new requirements.
“We spent 33 years building up to 2%, so to get up to that 45 basis points requirement is our first goal,” he said.
He stressed that his corporate will release its official comments in a couple weeks. However, he expressed concern about new weighted average life limits, calling them “too short.” He also said the proposed prohibition on paying a premium for redeemable CDs may prevent corporates from being competitive in a market that also includes deal-making brokers.
Paul Hixon, vice president of marketing and communications at the Corporate One Federal Credit Union, said his shop is also running numbers to determine if proposed regulations allow for a viable business model at the Columbus, Ohio-based cooperative. He said Corporate One will release its official comments on proposed corporate regulation in a couple of weeks.
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