Task Force Recommends Smaller, Simpler Corporate Credit Unions

CUNA and NAFCU’s Corporate Credit Union Restructure Policy Task Force envisions a corporate credit union system a good deal smaller and more restricted in its products and services than the current system.The task force presented its recommendations in an eight-page report to the NCUA that suggested changes to the products and services corporate credit unions offer, the ways corporate credit unions are capitalized and how the corporate credit union system should be structured.It also firmly argued to maintain corporate credit unions, even though some suggested eliminating them, taking as one of its principals that “there is significant value to NPCUs in the corporate system, and it will be beneficial to preserve that value in the future.”Since so much of the existing corporate credit union turmoil arose from their longer term investments, the task force recommended that corporate credit unions be restricted in the products and services they offer, including short-term investment products, payment processing and settlement services.The task force said it found “considerable value” in the corporate credit union’s payment and settlement services and urged that they keep offering them. “Although there are alternatives to some of these services from the Federal Reserve, Federal Home Loan Banks and commercial banks, the task force believes there is significant value to credit unions in having these services provided by not-for-profit organizations controlled by credit unions,” the task force’s report said.Since short-term credit and deposit accounts are tied to payments and settlement services, the task force recommended that corporate credit unions continue to offer these. But it urged that corporate credit unions not be allowed to offer longer term investment products. “This is the area that has historically and recently created the greatest risk in corporate credit unions. Purely for settlement purposes, a maximum maturity of three months would be sufficient,” the report said. “However, the task force believes that on-balance sheet deposit taking and investing in instruments of up to one year could be consistent with an acceptable level of risk. Even within this short maturity limit, care should be taken that interest rate risk is appropriately managed.”The task force urged that corporate credit unions be allowed to own investment CUSOs that would provide investment advisory and broker-dealer services to natural person credit unions. But the task force stressed these would act in a more advisory role to natural persons credit unions rather than holding long-term investments themselves.The task force also recommended that natural person credit unions be required to put in higher amounts of capital, first to belong to the corporate and then to help secured services that could be considered higher risk.“Contributed capital should be required for membership and service use,” the task force said. “In order to attract sufficient capital, the corporate of the future will have to present a sufficiently compelling business case covering both the value of services provided and strong risk control.”The group refrained from suggesting any specific capital level but suggested that level should vary by asset size and be capped. It also stated that natural person credit unions wanting to participate in services through corporate that are deemed riskier than others should have to put up additional capital. “Additional contributed capital should be required based on the amounts and types of business a NPCU does with a corporate, with the capitalization requirements depending on the risks to the CCU of offering the service,” it explained. “This additional service-based capital could be either Tier 1 or Tier 2, depending on the service, and should not be subject to a cap. The capital requirements by size or services should be prescribed by regulation and should be the same across all corporates.”The task force also urged that corporate credit unions face some form of Prompt Corrective Action “specifying what actions NCUA must take for any corporate credit union that is less than adequately capitalized.”Natural person credit unions would also serve as guardians of corporate credit union capital, according to the task force recommendations because insurance on corporate credit union deposits would revert to that of members of natural person credit unions for two reasons.“First, never again should the share insurance fund protecting members of NPCUs be burdened with significant losses arising from CCUs. The extension of coverage beyond the regular insurance limit, which was regrettably necessary recently, should never again be contemplated. Second, the absence of deposit insurance will induce NPCUs to more closely monitor the risk positions of the CCU(s) they belong to.”The report stated that the NCUA take the task force’s recommendations as one whole piece. On page one of the report the task force stated, “The task force stresses that the recommendations it presents are to be taken as an integrated set. Selecting the task force’s suggested direction in some areas while not in others will likely not lead to a corporate design that will be acceptable to NPCUs.”In the report conclusion, the task force appeared to couch its recommendations in a more nuanced tone, urging that the agency not take some without others while admitting it was a possibility.“The task force’s presents its recommendations as a comprehensive whole. The interplay among its suggestions on services, capital, structure and other issues is part of the design to create a robust system in the future. Substantial deviation from the basic principles of any of the major components of the proposed system will likely render the rest of the recommendations less effective. Therefore, the task force strongly encourages the NCUA not to pick and choose among the interrelated components of its recommendations,” the report concluded.–[email protected]