WASHINGTON – A CUNA task force on corporate credit unions on Monday recommended that corporate credit unions cease being investment houses for natural person credit unions – the genesis of their financial problems – and restrict their activities in the investment markets to being pass-throughs or broker-dealers.
The task force acknowledged the wide-spread anger and distrust among credit union managers over the growing losses they are accruing on corporate investments and concluded that a restructuring of the corporate network will be impossible unless any entity that replaces the corporates severely limits its investment activity.
The proposal, which will form the basis for CUNA’s comment letter on NCUA’s proposed corporate reforms, goes much farther than NCUA’s proposal – which would set tighter restrictions on corporate investments but still sees corporates as investment houses.
The task force also endorsed the much tougher capital levels set by NCUA’s proposal, saying they will be much easier to achieve if the corporates restrict or eliminate their investment practices.
The panel presented its report to the CUNA Board during the first day of CUNA’s annual Government Affairs conference yesterday, where about 3,500 credit union managers and volunteers are gathered this week.
"Basically, we’re saying that the general principles of the [proposed] regulations are appropriate," said Terry West, chairman of the CUNA task force and president of Vy Star CU in Jacksonville, Fla. "The model for corporate credit unions or whatever entity serves us in the future is going to have to be markedly different in order to be able to avoid some of the risks in the future."
The task force’s proposal recognizes the critical role the corporates play in the payments and settlements systems for credit unions and in other areas, and foresees some type of structure to enable that role to continue. But it makes no definite proposals along those lines. There is broad support for some credit union-owned and controlled-entity to perform those functions.
The task force report comes as NCUA is collecting public comments on its proposed reforms and as more than half of the corporates are reporting losses for 2009. While most of the losses are due to their exposure to U.S. Central FCU, much of it is due to the corporates’ own investments in risky mortgage-backed securities.
The corporate system was created in the 1970s to provide liquidity to natural person credit unions but evolved over the years so that corporates have become investment houses for credit unions, pooling funds from smaller entities to enable credit union money to compete with large Wall Street pools.
Under the task force’s proposal, corporates no longer would hold investments on behalf of their natural person credit union members but would serve as agents, broker-dealers or pass-throughs. "This would remove the risks from the balance sheets of the corporates," said West.
Bill Hampel, chief economist for CUNA and staff liaison to the task force, said there is a broad consensus among credit union representatives on limiting the corporates’ ability to engage in risky investment practices. "Credit unions are telling us they are willing to put in a limited amount of capital, but the risks to that capital must be limited," said Hampel.
The task force acknowledged the major problem with the corporate restructuring, that is as much as $40 billion of underwater MBSs held in the system, the so-called legacy assets at U.S. Central, WesCorp FCU and several other corporates, but makes no suggestions as to how to deal with those. NCUA last week said it is working on a proposed solution which is believed to be a plan to segregate the legacy assets in a single entity, a so-called bad bank, that would be managed while some of the assets are sold or held to maturity.
The other major issue not addressed is the likely consolidation of the corporate system. The task force members acknowledge that the impetus for any consolidation is going to have to come from the credit union movement, not from NCUA.
