ALEXANDRIA, Va. — With two corporates in conservatorship and others posting red numbers from investments in mortgage-backed securities, it should come as no surprise that among NCUA's chief priorities in crafting its new corporate regulations is reducing investment risk.
"We are looking at reducing risks through various measures but most notably by identifying 10 different investment sectors and establishing concentration limits for investments within any one sector," General Counsel Robert Fenner explained in a recent virtual town hall meeting. "We are looking at controlling investment risk also by prohibiting certain investments outright and by establishing limits on cash flow differential (and) the average life of assets."
The new rules will likely be less stringent than what the credit union trade associations asked for during the comment period. In an April letter CUNA chief Dan Mica called on the regulator to consider "the extent to which longer-term, riskier investments for corporate credit unions should be dramatically curtailed," suggesting natural-person CUs be given the option to purchase alternative investment vehicles through outside providers. The regulator seems poised to allow corporates to continue to purchase long-term investments, albeit with more stringent capital requirements and increased diversification. Corporates will also find their ability to lever up to take more investments onto the balance sheet reduced.
"There will be limitations on corporates' ability to take on leverage for the sake of building assets or taking positions in assets," said Office of Corporate Credit Unions director Scott Hunt.
"What we are contemplating is something comparable to what exists for natural person federal credit unions," Fenner continued. "Secured borrowing would be limited to borrowing for liquidity purposes in the short-term, say 30 days."
Wright Patman Congressional FCU director Curtis Prins is highly skeptical that anything NCUA does will be enough to prevent a corporate meltdown scenario from replaying in the future. He pointed to the prescence of an examiner at U.S. Central for years prior to its failure as a prime example of the governing body failing to force the corporate out of the way of the oncoming train.
"There have been plenty of regulations in place all the way along with the corporates," he said. "NCUA will not enforce actions to protect the system, to protect the share insurance fund and now after the whole stable of horses have left the barn now they are coming up with a screen door they are closing."
Call for NCUA Board Members to Step Down
Prins, who spent three decades as a staffer on the House of Representatives' Banking Committee and wrote draft legislation that eventually created NCUA, suggested implementing risk-based insurance premiums to reward well-run institutions, corporate capital requirements to be as tough as the ones on natural person CUs and aggressive legal action against mismanaged corporates. In his February letter to the regulator, Prins called on all three board members to step down. He told Credit Union Journal last week that those comments are just as valid today as when he wrote them earlier in the year.
"As long as we have those three board members, or people like them, we are going to have these kinds of problems. We just don't have regulators anymore that want to do the job," he said.
