WASHINGTON—Policies leading to Great Recession’s corporate meltdown appeared during Thursday’s NCUA board meeting, as members sparred over proposed changes to the agency’s regulation of corporate credit unions.

The three-person board unanimously supported changes that clarified some rules overseeing corporate capital and increased the corporates’ ability to lend; however, the unanimous vote also masked significant differences over what the rule change did not do.

Board Chairman Debbie Matz kicked off the debate. After praising the rule change for allowing corporate credit unions to count retained earnings acquired in mergers going forward, Matz turned to what the rule did not do.

“[B]ased on comments to our proposed rule, some may criticize this final rule — not for what it does, but for what it doesn’t do,” Matz said. “So for those who may criticize this rule because it doesn’t give corporates everything they asked for, let me share a historical perspective.”

Matz then delivered a short lecture on corporate credit union policies in the years leading up to the corporate meltdown and the subsequent damage those policies helped bring about.

“In 2008, troubled corporates held $50 billion in non-liquid investments which they could not sell off in any market. In the difficult years that followed, NCUA had to inject $26 billion of liquidity into the system. Corporates had to extinguish $5.6 billion in capital — most of which was contributed by member credit unions. All natural-person credit unions had to pay $4.8 billion in assessments to the Corporate Stabilization Fund to prevent massive losses to the Share Insurance Fund,” Matz stated; adding “so credit union officials urged us to never again allow corporates to make such non-liquid investments and operate with such thin retained earnings.”

She pointed out that the tough corporate credit union rules had succeeded in helping corporate credit unions wean themselves away from relying on investments for income and toward building up a secure capital base. And she noted that she had voted against relaxing the NCUA’s corporate credit union rules in 2002.

“I could not in good conscience vote to relax corporates’ capital requirements or extend their investment authorities beyond seasonal liquidity needs,” Matz concluded. “I couldn’t do it in 2002, and I won’t do it today. That’s why I support this final rule as written.”

Read more: McWatters objects ...

Board Member J. Mark McWatters took up the opposing side and began by saying he would support the changes as written, but also wished they could have done more.

“While I fully appreciate the financial turmoil and economic pain suffered by the broader credit union community in bailing out the misguided and ill-advised investment activity of the corporates,” McWatters said. “I am concerned that the regulatory pendulum has nevertheless swung too far the other way.”

McWatters zeroed in particularly on perpetual contributed capital that member credit unions invested with the corporates and questioned why it could not be viewed as capital for regulatory purposes.

“It is my understanding that PCC includes interests of a corporate that are perpetual, non-cumulative dividend accounts, are available to cover losses in excess of RE, are not insured by the share insurance fund, are considered a form of equity under GAAP, and are the regulatory equivalent of non-cumulative perpetual preferred stock,” Mcwatters said.

“It is also my understanding that no other financial regulator requires the full exclusion of PCC-type capital, including non-cumulative perpetual preferred stock or other similar permanently contributed capital, from an institutions calculation of core capital,” he added.

McWatters also cited one of the comments to the proposed rule in which Lee Butke, president/CEO of the Corporate One Federal Credit Union, pointed out that a corporate with $89 million more PCC than another coporate could nevertheless have the same regulatory capital ratios.

“With this example in mind, it’s challenging to understand why the corporates should suffer such a dramatic step-down in regulatory capital in today's low interest rate environment that inhibits their ability to generate retained earnings,” McWatters said.

However, the board was able to unify on one proposed corporate rule change that arose out the comments on the previous round of corporate rule changes. The Central Liquidity Facility bridge loan change would allow corporates to provide member credit unions apply for funding under the CLF with immediate bridge loans to cover the amount of the funding.

Since the time span between applying for CLF funds and funding them is around 10 days, the bridge loans would be for 10 days. Because the scope of the proposed change is so narrow, the agency will only take comments on the proposal for 30 days.

The meeting also had a split vote. The board split over the rule change that makes it easier to add associations to federal credit union’s field of membership. Metsger and Matz supported it and McWatters did not.

The change to the association rule will allow credit unions to automatically add associations from 12 categories. They included alumni groups, religious groups and churches, electric cooperatives, homeowner associations, labor unions, scouting groups, parent teacher groups, chambers of commerce; athletic booster clubs, fraternal organizations and civic groups, ethnic or cultural groups and professional groups.

“We felt strongly that credit unions should not be required to wait for approval from NCUA each and every time they want to add an association that clearly meets the common bond requirement,” Matz said. “We recognized there are certain categories of associations we don’t need to test to know they qualify. That’s why we proposed seven categories of associations to be approved automatically.”

However, McWatters argued that the rule added more regulations that it eased.

The final rule – except for the regulatory relief offered in the preapproval process –

accomplishes little except to increase the regulatory burden on the vast bulk of credit unions that remain in full compliance with the letter and the spirit of the associational common bond rules, McWatters said.

Instant Insights /

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