First, the corporates did not hold enough capital, so the agency is considering Basel-type, risk-weighted capital requirements for corporates, including a leverage ratio. For the leverage requirement, Fenner said the NCUA was looking at corporates raising net worth to 4% in three years, with 100 basis points coming from retained earnings within five years to be considered adequately capitalized. The proposed benchmark for well-capitalized was 5% net worth, with 150 basis points from retained earnings. If corporates were close to those goals, the NCUA stressed that it would allow them to continue operating under prompt corrective action agreements just like natural person credit unions.

Additionally, 4% Tier I capital would be required for adequate capitalization and 6% for well-capitalized status. In total capital, 8% would be required to be adequately capitalized and 10% for well-capitalized.

The retained earnings piece of the provision drew a lot of comments from the audience, which was made up of credit union CEOs, corporate credit union executives and trade association representatives. All the remarks centered on the seemingly impossible task of raising the retained earnings within the five-year window the NCUA was suggesting. Some suggested a longer time period, which the agency representatives said they would consider.

Based on the modeling the NCUA performed, according to Special Assistant to the Acting Director of the Office of Corporate CUs Scott Hunt, 21 corporate credit unions will have negative retained earnings following the release of U.S. Central's audited financials.

Concentration limits could also play a role in the new regulation. Specifically, the NCUA is considering a cap of the lesser of 25% of assets or five times capital in any category of investments except possibly government bonds. One of the many reasons U.S. Central and WesCorp are in such trouble now is because of their heavy concentration in mortgage-backed securities.

The agency is also studying new limits in weighted average life of assets and the differentials in the weighted average life of assets and liabilities as well as new stress testing for credit spreads.

Other pieces to the proposal could set corporate board member requirements and eliminate the preferential treatment of capital. Specifically, why was U.S. Central permitted to hold half the capital of other corporates?

Matz emphasized, “We're trying not to be prescriptive as to what the corporates do and what they look like.” All the agency representatives agreed that the marketplace should determine the final number of corporates and what products they will offer.

But another essential piece to the survival of the corporates and potentially credit unions themselves is keeping liquidity in the corporates so the agency is not forced to sell the currently nonperforming securities, Hunt emphasized. Additionally, the CU SIP funds will all be maturing in the first quarter of next year, and shares is the easiest way to replace them, NCUA Deputy Executive Director Larry Fazio added.

Some credit union executives questioned why they should give up better yields elsewhere and instead keep some money in corporates. Fazio urged CUs to mull over the net effect. He explained that the better yield to the CUs wouldn't be worth the losses from the sale of the corporate-held securities, which the withdrawing of deposits would precipitate. The expenses would be passed on to natural person credit unions as premiums.

Credit union executives' heads nodded round the room when one asked the NCUA officials to tell the examiners to back off on their net income requirements for a while so that the credit unions could afford to put money into corporates. Chairman Matz promised a letter addressing this would be forthcoming.

One thing the agency is keeping an eye on, and credit unions were too, was what happens when the current consumer flight to safety reverses and money starts flowing back out of credit unions and therefore from corporates.

Hunt added that while corporates, mainly U.S. Central and WesCorp, are relatively stable now, that's not without $20 billion in agency assistance.

While it's impossible to determine what CUs are going to be willing to recapitalize their corporate, the agency did some modeling and is anticipating consolidation. The problem is, Hunt said, that the weakest corporates financially are also the largest, so the mechanics of mergers will be very challenging.

The NCUA will issue an official proposal after two more town halls in National Harbor, Md., and San Diego, possibly as early as November, Matz told Credit Union Times, but definitely by the end of the year. She also said the agency would hold some Webcasts, if not more on-site town halls, after the proposal came out.

Fenner said depending on the length of the comment period and the number of comment letters received, a final rule could be out probably no earlier than spring 2010.

Other issues that came up during the town hall included the CARD Act's 21-day period between the borrower receiving a statement and the due date, alternative capital and the Consumer Financial Protection Agency. Executives in the room said they were satisfied with the airing of the issues.

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