CUNA Regulatory Comment Call
February 4, 2009
Corporate Credit Unions
- The National Credit Union Administration (NCUA) has issued an advance notice of proposed rulemaking (ANPR) regarding the structure and operations of corporate credit unions (corporates).
- The ANPR focuses on the role of corporates in the credit union system, including their membership structure, size, and types of services offered.
- Additionally, the ANPR details possible changes to the regulations governing corporates, specifically in regard to: capital; permissible investments; management of credit risk and liquidity; and corporate governance.
- Comments in response to the ANPR are due to NCUA by April 6; please submit your comments to CUNA as soon as possible.
- If sending comments directly to NCUA, please also include a copy to CUNA.
- CUNA's comment letter to NCUA will be written in collaboration with CUNA's Corporate Credit Union Task Force. The Task Force was formed late last year to address potential concerns with the corporates and is comprised of individuals from various natural person credit unions.
- February 4, CUNA held an audio conference on the Corporate Stabilization Program which included details on how to account for the capital injection, discussion from NCUA staff, and an overview of the economic ramifications likely to follow NCUA's actions. Detailed slides from the audio conference can be accessed here.
Please feel free to fax your responses to CUNA at 202-638-7052; e-mail them to Senior Vice President and Deputy General Counsel Mary Dunn at firstname.lastname@example.org and to Regulatory Research Counsel Luke Martone at email@example.com; or mail them to Mary and Luke in c/o CUNA's Regulatory Advocacy Department, 601 Pennsylvania Avenue, NW, South Building, Suite 600, Washington, DC 20004-2601. You may also contact us at 800-356-9655, ext. 6743, if you have questions or would like a copy of the ANPR. A copy of the ANPR can be accessed here.
Like all credit unions, the twenty-eight corporates are owned by their members. Corporates receive shares from and provide loan and other services to other credit unions. Among others, corporates offer payment, clearing, and investment services. Corporates also act as a source of liquidity for credit unions through short and medium term credit facilities, and also serve as agents on behalf of loans originating from NCUA's Central Liquidity Facility (CLF).
NCUA's release of the ANPR, in addition to several simultaneous measures, was prompted by concerns over the recent decrease in the value of corporates' investment portfolios and the virtual market freeze-up which has prevented the trading of certain investment securities. NCUA believes these challenges have undermined the stability of the corporate credit union system.
In an effort to help stabilize the corporate system-separate from the restructuring considerations addressed in this ANPR-NCUA has:
- Approved an infusion of $1 billion in capital into U.S. Central FCU from the National Credit Union Share Insurance Fund (NCUSIF).
- Approved a temporary NCUSIF guarantee of all member shares for corporates that agree to participate in a voluntary guarantee program offered by NCUA.
QUESTIONS FROM NCUA TO CONSIDER
*Note that many of these questions are on very narrow issues; please do not feel the need to address each question individually. Any concerns or suggestions regarding the corporate credit union system in general are welcomed.
In regard to the corporate credit union system, NCUA has identified several areas in which it feels re-evaluation is necessary. The primary concerns addressed in the ANPR are: (1) the role of the corporates in the CU system; (2) corporate capital; (3) permissible investments; (4) credit risk management; (5) asset liability management; and (6) corporate governance.
1) Role of Corporates in the Credit Union System
a) Payment System: Currently, payment services offered by corporates are coupled with other services.
i) Should payment services be isolated from other services to separate the risks? If so, how would this best be achieved?
ii) For example, would it be better to establish a charter for corporates whereby a corporate's authority is strictly limited to operating a payment system, with no authority to engage in other services, such as term or structured investments?
iii) Should a separate charter be available for corporates that want to provide investment services?
iv) Should NCUA establish a legal and operational firewall between payment system services and other services?
v) Are there sufficient earnings potential in offering payment systems to support a limited business model that is restricted to payment systems services only?
b) Liquidity and Liquidity Management: A vital role of corporates is to fulfill the liquidity needs of their members. Thus, it is crucial that corporates properly consider their investment position relative to their cash flow needs.
i) Should liquidity be considered a core service of the corporate system? If so, what steps should be taken, and by whom, to preserve and strengthen corporates' ability to offer that service?
ii) For example, should NCUA consider limiting a corporate's ability to offer other specific types of products and services in order to preserve and defend the liquidity function?
iii) What specific types of products and services should corporates be authorized to provide?
c) Field of Membership Issues: NCUA is questioning whether the allowance of national FOMs for corporates has resulted in significant, and unforeseen, risk taking.
i) Should NCUA return to defined FOMs, for example, state or regional FOMs?
d) Expanded Investment Authority: Currently, corporates meeting certain criteria can qualify for expanded investment authority; such as authority to purchase investments with relatively lower credit ratings than otherwise permissible under the rule.
i) Does the need for expanded authorities continue to exist? If so, should NCUA modify the procedures and qualifications, such as higher capital requirements? If so, what should the new standards be?
ii) Should NCUA reduce the expanded authorities available? If so, which ones? Alternatively, should any of the limits in existing expanded authorities be reduced or increased? If so, which ones? Once granted, should NCUA require periodic re-qualification for expanded authorities? If so, what should be the timeframe?
e) Structure; Two-Tiered System: NCUA solicits comment on whether the current two-tier corporate system meets the needs of credit unions. Specifically, NCUA seeks input on whether there is a continuing need for a wholesale corporate credit union.
i) If so, what should be its primary role?
ii) Should there be a differentiation in powers and authorities?
iii) Does the current configuration result in an inappropriate transfer of risk from the retail corporates to the wholesale corporate?
iv) Assuming the two-tiered system is retained, should capital requirements and risk measurement criteria (e.g., net asset value volatility), as well as the range of permissible investments, for the wholesale corporate be different from those requirements that apply to a retail corporate?
2) Corporate Capital: NCUA is considering revising certain definitions and standards for determining appropriate capital requirements for corporates. In addition to the questions below feel free to comment on any revisions NCUA should consider for the definition and operation of membership capital.
a) Core Capital: Currently, core capital is defined as retained earnings plus paid-in capital.
i) Should NCUA establish a new capital ratio for corporates consisting only of core capital, and if so, what would be an appropriate level?
ii) What actions are necessary to enable corporates to attain a sufficient core capital ratio as described above?
iii) What would be an appropriate timeframe for corporates to attain sufficient capital?
iv) How much emphasis should be placed on generating core capital through undivided earnings?
v) Should a corporate be required to limit its services only to members maintaining contributed core capital with the corporate?
b) Membership Capital
i) Should NCUA continue to allow membership capital in its current configuration, or should it eliminate or modify certain features, such as the adjustment feature, so that membership capital meets the traditionally accepted definition of tier-two capital?
ii) Should the adjusted balance requirements, currently in §704.3(b)(8), be tied only to assets, and should limits be imposed on the frequency of adjustments?
iii) Should there be a requirement that any attempted reduction in membership capital based on downward adjustment automatically result in the account being placed on notice, within the meaning of §704.3(b)(3), so that only a delayed payout after the three-year notice expires is permissible?
iv) Should there be a requirement that any withdrawal of membership capital be conditioned on the corporate's ability to meet all applicable capital requirements following withdrawal?
c) Risk-Based Capital and Contributed Capital Requirements
i) Should NCUA consider risk-based capital for corporates consistent with that currently required of other federally regulated financial institutions?
ii) What regulatory and statutory changes, if any, would be required to effectuate such a change?
iii) Should a natural person credit union be required to maintain a contributed capital account with its corporate as a prerequisite to obtaining its services?
iv) Should contributed capital be calculated as a function of share balances maintained with the corporate? What about using asset size?
3) Permissible Investments: Currently, corporates have the authority to purchase and hold investments that would not be permissible for natural person credit unions. Thus, a member of a corporate is indirectly exposed to any risky investments held by the corporate.
a) Should corporate investment authorities be limited to those allowed for natural person credit unions?
b) Should certain categories, or specific, investments be prohibited? (For example: collateralized debt obligations, net interest margin securities, and subprime and Alt-A asset-backed securities).
4) Credit Risk Management: With many questioning the reliability of credit ratings for investments, NCUA is considering limiting the extent to which a corporate may focus on ratings provided by Nationally Recognized Statistical Rating Organizations (NRSROs).
a) Should NCUA require more than one rating for an investment, or require that the lowest rating meet the minimum rating requirements of Part 704?
b) Should additional stress modeling tools be required in the regulation to enhance credit risk management?
c) Should Part 704 be revised to provide specific concentration limits, including sector and obligor limits? If so, what specific limits would be appropriate for corporates?
d) Should corporates be required to obtain independent evaluations of credit risk in their investment portfolios? If so, what would be appropriate standards for these contractors?
e) Should corporates be required to test sensitivities to credit spread widening, and if so, what standards should apply to that effort?
5) Asset Liability Management: NCUA is considering reinstating the requirement that corporates perform net interest income modeling and stress testing. Alternatively, NCUA may consider some form of mandatory modeling and testing of credit spread increases.
a) Should NCUA require corporates to use monitoring tools to identify these types of trends? What, if any, tangible benefits would flow from these types of modeling requirements?
6) Corporate Governance: Due to the sophistication and far-reaching impact of corporate activities, NCUA is considering several changes to corporates' boards.
a) Should NCUA establish minimum standards for directors in regard to their level of experience and independence?
b) Should "outside directors" be allowed? (I.e., those who are not officers of that corporate, officers of member natural person credit unions, and/or individuals from entirely outside the credit union industry).
c) Is the current structure of retail and wholesale corporate credit union boards appropriate given the corporate business model?
d) Should a wholesale corporate credit union be required to have some directors from natural person credit unions?
e) Should NCUA impose term limits on corporate directors, and, if so, what should the maximum term be?
f) Should corporate directors be compensated, and, if so, should such compensation be limited to outside directors only?
g) Should NCUA allow members of corporates greater access to salary and benefit information for senior management?
7) Other Comments: NCUA also seeks comment on any other relevant issues pertaining to corporate credit unions that have not been addressed in this ANPR.
Eric Richard General Counsel (202) 508-6742 firstname.lastname@example.org |
Mary Mitchell Dunn SVP & Deputy General Counsel (202) 508-6736 email@example.com
Jeffrey Bloch Assistant General Counsel (202) 508-6732 firstname.lastname@example.org
Luke Martone Senior Regulatory Counsel (202) 508-6743 email@example.com