ALEXANDRIA, Va. — Proposed reforms to NCUA's corporate credit union regulations will blur the distinction between so-called wholesale corporates and retail corporates, likely meaning the end of U.S. Central FCU, the nation's only wholesale corporate that has been run under NCUA conservatorship since March.
The proposed regulations, issued by NCUA last week for a 90-day comment period, would tighten minimum capital standards for the corporates, restrict investments and set strict new rules for corporate governance-but would be uniform for all corporates.
Rule Doesn't Address '800-Pound Gorilla'
But the proposed rules do not deal with the "800-pound gorilla in the room" as NCUA Board member Gigi Hyland put it, referring to more than $15 billion of toxic mortgage-backed securities on the books of the corporates-more than $10 billion held by U.S. Central.
The proposal also does not deal the recapitalization of the corporates, almost all of which are undercapitalized under NCUA's current rules, and as many as a half dozen that are insolvent.
The recapitalization of the corporates and the potential consolidation of the system will be left to the credit union system and will not be directed by NCUA, according to Deborah Matz, chairman of the NCUA Board. "This rule does not prescribe what kind of corporate will exist, where they will reside or what kind of services they will offer," said Matz.
But the rules are likely to mean the end of U.S. Central, which is continuing to report huge losses and has had all of its capital depleted. U.S. Central has reported more than $6.2 billion of losses since the start of 2008. Both U.S. Central and WesCorp FCU, also under NCUA conservatorhsip, reported a whopping $500 million of losses in the last quarter, according to Scott Hunt, director of NCUA's Office of Corporate CUs. "You can't earn $500 million very quickly," he said, of a proposed timeline for corporates to rebuild their capital.
Moreover, he said, with the nature of U.S. Centrals investments, "it's very difficult for the current business model of USC going forward."
The major issue facing NCUA with the corporates is the massive amount of troubled mortgage assets held by the corporates, the NCUA Board members agreed. The agency is currently exploring ways to dispose of some of those assets without triggering realized losses on the corporates' books.
The proposed rule would require all corporates eventually reach a 4% minimum leverage ratio; 4% tier one risk-based capital ratio and 8% total risk-based capital ratio, replacing the current 4% minimum total capital ratio.
It would replace the term "paid-in-capital" with a new type of capital called "perpetual contributed capital," and the term "membership capital account" with "non-perpetual contributed capital account" which would have longer terms. The proposal would also require that retained earnings constitute a certain portion of capital. The proposal would also bar corporates from redeeming contributed capital prior to maturity without the prior approval of NCUA or the relevant state regulator.
Rule Bars Corporates from Investing in CDOs
It would bar corporates from investing in collateralized debt obligations, something that snared WesCorp, and also in net interest margin securities.
And it would set new strict eligibility for serving on a corporate board, requiring that directors be sitting CEOs, CFOs or COOs of natural person credit unions; do not serve more than two consecutive terms on the board; prevent an individual from sitting on the board of more than one corporate at the same time; and have each director be a representative of a natural person credit union.
