MONTEREY, Calif. — Why troubled corporates just weren't allowed to fail, what CUs need to do to get their phone calls returned in Washington, and how credit unions can better prepare for 2009 exams by regulators were all given attention during a panel discussion here.
The session, which took place just days before NCUA placed U.S. Central and WesCorp into conservatorship, during the Big Valley Conference was moderated by California/Nevada league CEO Bill Cheney and included Q&A with the audience, some of which is included below. Speaking to credit unions were NCUA Vice Chairman Rodney Hood, California Department of Financial Institutions Commissioner of Financial Institutions William Haraf, and DFI Deputy Commissioner, Director of Credit Unions RaAnn Wood. (A separate piece featuring Wood's insights on what CUs should be prepared for during 2009 exams appeared in the March 23 Credit Union Journal).
Here is a look at some of what was discussed:
Hood: I don't think these times are insurmountable. We did, as a board, come up with measures we think will provide security. I know many of you said, "Well, why not let the corporates fail?" Failure is not an option. Too many credit unions require corporates for payments systems and liquidity and investments. Last August, through conversations with Treasury and the Federal Reserve, we knew if we did not take action at some point we would not have stable corporate credit unions. We had an internal working group prepare the Corporate Stabilization Plan. In addition to the internal group, we commissioned a study by Price Waterhouse to vet our CSP. We knew it was going to be a Herculean task. The Fed advised us that some of the larger corporates did not have the liquidity needed to survive.
Audience Member: We talked to (NCUA) Chairman (Michael) Fryzel about the fact Congress has approved TARP funds for CUs twice. He said he'd been trying to contact Treasury and was not getting phone calls returned. Why are banks getting their stabilization and we're not getting any phone calls returned?
Hood: We have been trying to approach (Treasury Secretary Timothy) Geithner and he has been woefully understaffed. All (NCUA) board members have been working with Congress about importance of funding stabilization effort. We recognize there is not going to be one silver bullet. We're asking Congress to allow us to use CLF for capital, and are trying a number of things to lessen effects on your balance sheets. Let your congressman hear from you directly. I think more individuals in Washington recognize that Cus do have some ripple effect from the deterioration in the credit market.
Haraf: We supervise community banks, and the number of our banks that have received TARP capital is about 20% of the 210 we supervise. One-hundred fifty-five applied; about half were approved and handed off to Treasury, and about half of those were funded. The total amount involved is $1.7 billion. What I found out in the course of this project is the standards community banks were held to to access TARP funds were much different than the large financial institutions. There are many more affinities between the community banks we supervise and the credit unions we supervise, than with the large banks.
Audience Question: What about CUs and CRA?
Hood: There is a move now in DC to get credit unions involved in CRA. I once had the role as a CRA officer for Bank of America. With that said, I don't think credit unions need government legislation to get them to do the right thing.
Audience Question: How would credit unions' tax status be affected by accepting TARP funds?
Hood: My concern has been that using TARP for credit unions would blur the lines and make you appear like banks and it would open Pandora's Box. It would raise questions such as, "If credit unions are getting tax funds why have an independent regulator and a tax exemption?" But if the industry wants us to pursue TARP, we will do that.
Audience Question: What about the accounting bulletin on the 51 basis points? Does it need to be accounted for by March 31.
Hood: Yes, for all CUs over $10 million. But we encourage you to work with your local accounting firm on how to handle your statements. We are looking at being able to spread it out over five to even eight years.
Cheney: What about concentration risk? The people who had the greatest concentration risk have paid the price, and everyone else is suffering for it. But concentration is only growing in the largest institutions, and there doesn't seem to be an end to it. How do we get away from these runaway trains?
Haraf: President Obama and (Fed Chairman) Bernanke have all said we have to get rid of these too-big- to-fail institutions. Right now the direction seems to be over just stabilizing those organizations. Many are convinced that part of the solution is to decentralize our system and to be more community based. I think that not only were the Citibanks and the others too big to fail, they were too big to manage, too big for their boards to govern, and too big for regulators to supervise. It's not healthy overall, and it's not healthy for California. One benefit I think is people will see the advantage of local organizations.
Audience Question: How do we find out about your new expectations as examiners before you walk through the door?
Wood: I think the key things we will look at much more deeply are the allowances, new lines of business and the related due-diligence with your various vendors. Often we see due diligence in the beginning but not on an ongoing basis. On managing lines of business, such as your real estate lending, you need to know exactly what your values are. We're seeing tremendous deterioration in credit scores of the borrowers and deterioration of credit quality, and if you've got open lines you've got to be reevaluating that.
Hood: We're looking at all of these things, plus some of your lending sources. A lot of you who have seen an increase in shares are seeing money that is rate sensitive. How are you funding real estate? We want to make sure it's not hot money funding long-term loans. Corporate governance at the natural-person CU is something we're looking at as well. We want to see that you are getting the most competent board members you can.
Audience Question: What about private share insurance?
Wood: We have 14 credit unions in California that are privately insured. We monitor what they do and participated in their audit last week. We have some confidence in the way they do things. We did hear from some privately insured CUs doing the "Aha!" In not getting hit by the assessment.
Hood: There is no effort to merge the two insurers (private and federal). But if a large, privately insured credit union were to fail I do think a lot of people in Washington would ask NCUA, 'Where were you?' I don't think those folks know these privately insured institutions are out there, but that's up to them and their boards.
