he NCUA Board's proposed corporate credit union regulations are most notable for what they do not do. For example, they don't outline a viable corporate credit union business plan going forward under the new limitations. Not that they should, but the proposed regulations become a mere academic exercise if the bar gets raised so high (although probably necessarily high) that no corporate credit union can leap it.
The proposed regulations are also totally silent about what happens to the legacy assets that weigh heavily on the corporate credit union network and the industry as a whole. These legacy assets are believed by credible industry analysts to represent as much as $30 billion in eventual losses, which could potentially cost each credit union 500 basis points in deposit insurance premiums. Every federally insured retail credit union is on the hook for these legacy assets via the NCUSIF, the Temporary Corporate Credit Union Stabilization Fund and the Central Liquidity Facility's U.S. Treasury borrowings.
The NCUA's proposed corporate credit union regulations assume that there will still be corporate credit unions left to operate under the new regulations, potentially including the two conserved corporates?Western Corporate Federal Credit Union and U.S. Central Federal Credit Union?despite these legacy assets hanging precariously over the industry like the foreboding sword of Damocles. Perhaps the NCUA Board is afraid to believe otherwise because the house of cards would tumble leaving the agency with no palatable solution. For the rest of us, it is difficult to imagine that retail credit unions would risk recapitalizing the corporates until the legacy assets issue is resolved.
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The timetable for corporate credit unions to rebuild capital under the proposed regulations, both through contributed capital and retained earnings, is ten years. That suggests that any corporate credit union going forward would likely be undercapitalized for those same ten years. That's a long time to leave the NCUSIF and the TCCUSF exposed?and via those funds the retail credit unions would also remain exposed. That of course assumes that a corporate credit union business model can be developed that is both price competitive and that achieves a net spread much larger than has been the historical corporate credit union margins. And let's not forget those legacy assets.
For all practical purposes, there is no capital left in the corporate credit union network, and corporate credit unions exist today only due to NCUA's regulatory forbearance and conservatorships. Even the handful of individual corporate credit unions that claim to technically have some capital remaining are woefully undercapitalized in relation to the risks represented by their untenable business plans. The only way that retail credit unions can be sufficiently firewalled from more losses would be to completely phase out the corporate credit union network and the systemic risk that it represents. That would also mean that retail credit unions that chose not to use the corporate credit unions would not be subsidizing the risks via the NCUSIF, TCCUSF and CLF.
Without an effective solution to the legacy assets problem, the proposed corporate credit union regulations are essentially moot. In the long run, a political solution potentially including a financial bailout in which the U.S. Treasury, the Federal Reserve and the NCUA all playing a role is a highly probable scenario.
If necessary, the NCUA via the CLF could temporarily take over the entire liquidity and payment systems role of the corporate credit union network and at the same time manage the wind down of the legacy assets with the help and guidance of the Treasury and the Fed.
The credit union industry will have to work through its pain (and denial) about the probable end of the corporate credit union network and continue to pay high deposit insurance premiums to buy the time needed to come up with the more comprehensive solution to the huge legacy assets problem.
Marvin C. Umholtz is president/CEO of Umholtz Strategic Planning & Consulting Services. He can be reached at 360- 951-9111 or [email protected]
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