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GAO: Corporates Are In Good Financial Shape

WASHINGTON-A new government study found that corporate credit unions are coming under increasing strain because of competitive pressures that could pose future risks to the system, and recommends increased monitoring of the corporates by NCUA.

But the study by the Government Accountability Office found that corporates are financially healthy, even as some adopt greater risks in order to provide members with competitive returns in the low interest-rate environment of the past few years. The GAO recommended that NCUA beef up its oversight program for corporates, a step the federal regulator has already undertaken over the past few years.

"Basically, the GAO found that corporates are doing a good job of managing their risks and managing their portfolios," said Jeff Taylor, an economist with NAFCU. "I think it's a real positive for credit unions."

The study, titled "Corporate Credit Unions: Competitive Environment May Stress Financial Condition, Posing Challenges for NCUA Oversight," was requested by Maryland Sen. Paul Sarbanes, top Democrat on the Senate Banking Committee.

In a letter to Sarbanes, the GAO noted the corporate network has changed markedly since the system was last studied in 1991, with the number of corporates reduced from 44 to 31 (including U.S Central CU), the numbers of assets held more than doubled to $55 billion, and the products and services offered expanded.

The GAO found that the corporates' financial condition as measured by profitability and capital levels has remained close to what it was in the 1990s. But since 2000, a large influx of deposits, combined with the low interest rate environment, has constrained profitability and caused some corporates to adopt greater risk in exchange for higher returns.

Average return-on-assets (ROA) for the corporates has trended down from around 38 basis points in 2001 to around 20 BPs in 2003, putting constraints on what corporates can pay out to their members, as well as on capital levels, the GAO said. But the GAO emphasized that despite the growing pressures on the network, the surviving 31 corporates appear to be healthy financially, with many of them now relying on less-permanent forms of capital to maintain their required capital.

The change in the network, according to the GAO, has required a different oversight strategy by NCUA. In response, NCUA has created a centralized office for corporate oversight, amended some of its corporate regulations, implemented risk-based examinations, and hired new specialists.

But the GAO said NCUA needs to do more in identifying network-wide problems on a consistent basis, using specialists effectively, providing relevant guidance on mergers, and assuring the quality of corporates' internal controls.

Although corporate mergers continue, the GAO said NCUA has not developed adequate guidance for submitting and reviewing merger proposals.

The GAO recommended that NCUA improve its systems for tracking and analyzing exam deficiencies to address complex and emerging issues; increase oversight of corporate risk issues; provide improved guidance on mergers; and require internal control reporting consistent with other financial institutions.

CEO Confidence Declines

DALLAS-The confidence credit union CEOs have in the U.S. economy has dropped to its lowest point of the year, according to a just-completed, quarterly survey conducted by Southwest Corporate FCU.

Confidence in the economy had been trending upward since Southwest Corporate launched its Credit Union CEO Confidence Index at the beginning of this year, but in the latest national survey of more than 480 credit union CEOs, there was a sharp decline in optimism, with the Confidence Index dropping to 41.06 from 47.4.

The Credit Union Journal's On Deadline coverage is sponsored by Liberty. For info: www.libertysite.com.

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