CUNA Comment Letter
CUNA Comments on 12 C.F.R. Part 704, Second Advance Notice of Proposed Rulemaking
February 20, 2001Sent Via E-mail
Ms. Becky Baker
Secretary of the Board
National Credit Union Administration
1775 Duke Street
Alexandria, Virginia 22314
Dear Ms. Baker:
The Credit Union National Association (CUNA) appreciates the opportunity to comment on the second Advance Notice of Proposed Rulemaking (ANPR) from NCUA regarding its regulations governing corporate credit unions. CUNA represents more than 90 percent of our nations 10,500 state and federal credit unions.
CUNA wishes to echo the comments of the Association of Corporate Credit Unions (ACCU). As a result, rather than addressing each of the questions NCUA has posed, CUNAs comments below set forth the capital standards and ratios that it understands corporates believe should be implemented. These standards, CUNA believes, address the interrelated issues of credit concentration limits, interest rate risk and credit risk measurements raised in the second ANPR. In addition, the proposed standards correlate to other financial institution regulators definitions and measurements while taking into account the unique nature of corporates.
The definition and treatment of capital is a critical element of the ANPR, and key to the survival of corporates. In recent years, corporates have made capital accumulation a priority and as of October 2000, corporates regulatory capital (excluding U.S. Central) totaled 9.77%.1 NCUA has not identified any safety and soundness concerns regarding corporates capital position; and NCUA seeks to align the capital requirements of corporates with those of other financial institution regulators.
CUNA agrees with this approach. Such as approach would help promote a clearer understanding of corporates by other regulators on Capitol Hill. In accomplishing this goal, however, corporates uniqueness must be taken into account and capital requirements should be commensurate with the risks assumed. Corporates have a significantly lower risk than commercial banks. Thus their regulatory capital requirements should not be the same.
CUNA does not support NCUAs proposal to amend the definition of "capital" so that only "qualifying" MCAs (5 year) and PIC (perpetual) are given 100% credit in the capital ratio calculation. This would allow corporates to count only $.60 for every dollar of 3-year MCAs as capital and only 60% could be included in the NEV ratio calculation. Given corporates' risk profiles, the NCUA has no safety and soundness concerns that merit such treatments.
CUNA believes that the current capital accumulation methods in Part 704 already provide the basis to compare corporates with the banking industry. CUNA urges NCUA to give 100% credit for existing 3-year MCAs in the capital and NEV ratio calculations and for credit concentration limits.
CUNA supports the proposed risk-based capital requirements and minimum ratios. However, CUNA does not support NCUAs suggestion that a minimum 2% RUDE ratio should be included in the regulation. Such a measure is needlessly burdensome and would not enhance corporate stability.
MEASURE FOR ADJUSTED BALANCE MCAs
CUNA does not support requiring a measure for adjusted balance MCAs based on a 12-month average. A corporate should be allowed, on a fully disclosed basis, to determine the standard calculations for the MCA deposit. Also, CUNA does not support the addition of regulatory language that dictates the frequency of the adjustment period as each corporate should determine that for itself.
CREDIT CONCENTRATION LIMITSAs a percentage of capital:
CUNA supports NCUAs proposal to set credit concentration limits based on a corporates capital, but the definition of "capital" must give 100% credit for 3-year MCAs and for 20-year or longer term PIC as discussed above. Tying credit concentration limits to credit ratings:
CUNA also maintains that issuer concentration limits should vary depending on the credit risk presented by an exposure, and that these limits should be independently determined by the corporate taking the exposure, rather than be unilaterally linked to rating agency ratings. Limit for the aggregate credit exposure to a single obligor
NCUA seeks comment on establishing a limit for the aggregate credit exposure to a single obligor that has issued debt obligations across multiple rating categories. CUNA does support such a limit for the aggregate credit exposure to a single obligor. However, CUNA believes that such a limit should be a multiplier of total capital rather than tied to debt obligations across multiple credit rating categories. CUNA proposes that the credit exposure limit be one times a corporates total capital. This is consistent with the other risk measures proposed as well as state statutory legal lending limits.
Based on the limited credit risk and reliance on collateralization within corporates, as opposed to the credit worthiness of the issuer, CUNA supports an increase in the credit concentration by obligor on tri-party repurchase transactions to 200% of a corporates total capital with no credit rating differentiation.Exemptions from Limits
NCUA seeks comments on whether corporate credit unions should be exempt from credit concentration limits when investing in other corporate credit unions. Investing corporates are encouraged to maintain a credit risk file for investments greater than $100,000 in another corporate. We believe an issuer and aggregate limit should be established to limit systemic risk. De Minimus Exemption
NCUA seeks comment on whether there should be a de minimis exemption from credit concentration limits and, if so, what should the amount of the exemption be. A reasonable exemption, of $5 million, from credit concentration limits will assist smaller corporates to generate income.
ASSET LIABILITY MANAGEMENT
CUNA recommends that 3-year MCAs be excluded from liabilities along with 20-year PIC. Such an approach would permit NCUA to utilize the same capital standard for all purposes.
The minimum NEV ratio should be raised to 2 percent, assuming that 3-year MCAs can be included in the ratio calculation and not treated as liabilities.
The minimum NEV ratio that triggers monthly interest rate sensitivity analysis testing should be increased from two percent to three percent, only if 3-year MCAs are excluded from liabilities.
AGGREGATE INVESTMENT BY FCUS IN CORPORATE PIC AND MCAs
As part of these proposals regarding corporates capital, CUNA strongly encourages NCUA to amend Part 703 to increase the limit on the aggregate purchase of member PIC and MCAs in a corporate from one percent to two percent. CUNA also supports the addition of a new provision that imposes a four percent limit on the aggregate purchase of member PIC and MCAs in all corporate credit unions.
CUNA does not support the proposed change regarding corporate CUSOs. If NCUA is concerned that a corporate is not doing due diligence in making these loans, then such concerns should be addressed during the examination process rather than changing the regulation.
Requiring a 25% equity ownership in a CUSO before it can be deemed a "corporate CUSO" would limit corporates role as system liquidity providers and add an unnecessary infrastructure.
LOAN PARTICIPATION AUTHORITY
CUNA would like to provide additional information to NCUA on one other issue raised in the first ANPR regarding loan participation for corporates.
CUNA urges NCUA to permit corporates to engage in loan participations with their members on a recourse basis. In addition, NCUA should review and incorporate the credit analysis, lending policy and procedures and recourse arrangement standards contained in Banking Circular 181 and use that regulatory language to permit corporates to engage in loan participations with their members. Moreover, CUNA urges NCUA to consider allowing corporates to participate in loans with and without recourse so that credit unions can receive favorable accounting treatment.
CUNA appreciates the opportunity to comment on these proposed changes. If you have any questions, please call me or Michelle Profit, Assistant General Counsel at (202) 682-4200.
Mary Mitchell Dunn
Associate General Counsel and Senior Vice President
cc: Association of Corporate Credit Unions