WASHINGTON-The NCUA Board last week issued for comment a rule that would bar certain incentive-based bonuses that would encourage risky management behavior or expose credit unions to large losses and require all credit unions over $1 billion to disclose incentive packages on an annual basis.
The rule, required of bank and credit union regulators under last year's Dodd-Frank Financial Reform Act, goes a step further than the banking regulators by requiring all credit unions over $10 billion in assets (the FDIC set the bar at $50 billion) to defer 50% of all cash bonuses for three years or more, then adjust those bonuses for any losses their credit unions report during that period.
NCUA Chairman Debbie Matz emphasized that the proposed rule and its certain enactment later this year is required by the new financial reform bill and was not dreamed up by NCUA. She also noted the disclosures cover the structure of the bonuses, and not the dollar amount. "I think that's an important distinction," said Matz.
The Dodd-Frank requirement was in response to findings that some of the biggest financial failures over the past few years were related to cases where managers were rewarded for risky policies that provided rich returns to their institutions. NCUA claims that the failure of WesCorp FCU was driven by lucrative incentive packages awarded top executives for earnings and other goals.
The disclosures will cover all bonuses to be paid to presidents, chief executive officers, chief financial officers, chief operating officers, chief investment officers, chief legal officers, chief lending officers, chief risk officers or heads of major business lines for credit unions over $1 billion in assets. That amounts to 184 credit unions, including 169 natural person credit unions and 15 corporates. There are six credit unions over $50 billion in assets, three natural person credit unions (Navy FCU, Pentagon FCU and North Carolina State Employees' CU) and three corporates.
The rule is expected to take effect in 2012.
The NCUA Board also renewed the interest rate ceiling for all federally chartered credit unions at 18%, the same as last year. The interest rate ceiling is the maximum allowable rate that can be charged on any loan by a federally chartered credit union.
The Board also issued for comment a proposed rule, also mandated under Dodd-Frank, which will replace the requirement in all investment regulations that credit unions obtain credit ratings from the Wall Street agencies and instead do an internal credit analysis of the counterparty in the transaction under an internal standard created by the credit union's own board of directors. "The proposed rule replaces the standard credit rating-which came under attack during the financial crisis as many Triple A-rated securities failed-with a case-by-case analysis to decide whether a certain investment has the capacity to meet its financial commitments."
The NCUA Board also approved new chartering standards for corporate credit unions for the first time in 30 years.
