New Structure Calls For New Cooperation

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FEDERAL WAY, Wash.-NCUA's decision to limit corporate CUs from offering longer-term investments may have opened the door for a new form of credit union cooperation.

"Corporates will link to CUSOs or will outsource to third parties," said John Annaloro, president and CEO of the Washington CU League, adding an advantage is gained because the capitalization requirements for the corporate would be diminished as the activity is off-balance sheet.

"There is a possibility of corporates forming an investment partnership with a group such as CUNA Mutual, which already has broad investment authority under the Bank Modernization Act. Through this, corporates might be able to access investment products that are impermissible under the new NCUA rule-higher-yielding funds that are critical for operations. I think everyone realizes the new rules might be a viable business model, and therefore partnerships are necessary."

Due to conservatorships, five corporates need to be reconciled from the resolution phase following a conservatorship, Annaloro observed. He said the "expedient path" is for the failed corporates to merge into one of the survivors.

"Wholesale financial institutions are volume businesses. They need to keep their cost per transaction low, so consolidation makes sense. I would not want to guess how many corporates there will be, because there will be some modified forms of corporates. There may be corporates that specialize in payments, settlement and clearance, which is different from the business of investments."

If the new corporates decided to take settlement and/or payment systems functions and outsource them to other providers, for instance, that might lower the recapitalization costs for the new entities, he said. "The lower the capitalization cost, the greater the inclination of natural-person credit unions to participate in recapitalizing the new corporates."

As for the companies that are champing at the bit to take over some of the functions previously performed by corporates, Annaloro said transfer of funds has to be between financial institutions, so it might not be possible for some third-party vendors to legally handle the cash flow transfers without themselves being chartered institutions.

"Some of them may have to partner with standing corporates rather than handling it themselves. Some things are best done under a corporate-style charter, especially meeting the liquidity needs of credit unions."

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