State Regulators Hope Crisis Brings About More 'Reality-Based Regulation'

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LANSING, Mich.-Board members and senior management are responsible for what happens to their institutions, but state regulators aren't completely laying the blame for losses that damaged so many corporate credit unions at their feet.

"Clearly I think it took most folks by surprise in terms of the scope and breadth of it," said Roger Little, deputy commissioner with the state of Michigan's Credit Union Division. "I don't think investors could have known the breadth of what was going to occur, but what was equally apparent is that the system didn't realize the aggregate exposure it had to the mortgage sector."

While he declined to comment specifically on conversations he had with members of the board at Southfield, Mich.-based CenCorp CU, citing confidentiality, Little noted that no one foresaw how bad the housing crisis would get.

The Michigan regulator does not see much in the proposed NCUA rule that will radically change the way corporates act as investment conduits. But he does see more discipline coming into the system both through regulatory mandate and the hard-earned lessons of the past few years.

"The credit unions who own the corporate system will be paying more attention to what's going on and the risks that they are undertaking and I think they will take the approach of what they used to take, which was on safety as opposed to liquidity and yield," he said.

But with trust eroded and balance sheets wrecked at some corporates, other natural-person CUs are likely looking at bringing their investments in-house-and may have no choice.

"We do have natural-person credit unions today that are making investments through brokers, and in our examination process we ensure that they do due diligence in whom are working and the investments that they're making," Tom Candon, Vermont's Deputy Commissioner of Banking and Securities pointed out.

Little is hopeful that the coming years will see an emphasis on "reality-based regulation" that will include greater cooperation between state and federal regulators. Candon noted that both corporates in receivership, U.S. Central and WesCorp, are federal institutions, but their failures had widespread impact on state-charted institutions, including natural person CUs. Candon noted that many state-chartered credit unions in Vermont are reliant on Tricorp and EasCorp, both federally-chartered institutions located in Maine and Massachusetts, respectively, and his department would be interested in participating in their exam processes.

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