WASHINGTON-A CUNA task force on corporate credit unions recommended last week that corporate credit unions cease being investment houses for natural person credit unions - the genesis of their financial problems - and restrict their activities in the investment markets to being pass-throughs or broker-dealers.
The task force acknowledged the wide-spread anger and distrust among credit union managers over the growing losses they are accruing on corporate investments and concluded that a restructuring of the corporate network will be impossible unless any entity that replaces the corporates severely limit its investment activity.
The proposal, which will form the basis for CUNA's comment letter on NCUA proposed corporate reforms, goes much further than NCUA's proposal which would set tighter restrictions on corporate investments but still sees corporates as investment houses.
The task force also endorsed the much tougher capital levels set by NCUA's proposal, saying they will be much easier to achieve if the corporates restrict or eliminate their investment practices.
The panel presented its report to the CUNA Board yesterday during the first day of CUNA's annual Government Affairs conference, where about 3,500 credit union managers and volunteers are gathered this week.
"Basically, we're saying that the general principals of the (proposed) regulation are appropriate," said Terry West, chairman of the CUNA task force and president of VyStar CU in Jacksonville, Fla. "The model for corporate credit unions or whatever entity serves us in the future is going to have to be markedly different in order to be able to avoid some of the risks in the future."
Under the task force proposal, corporates would no longer hold investments on behalf of their natural person credit union members but would serve as agents, broker-dealers or pass-throughs. "This would remove the risks from the balance sheets of the corporates," said West.
Bill Hampel, chief economist for CUNA and staff liaison to the task force, said there is a broad consensus among credit union representatives on limiting the corporates' ability to engage in risky investment practices. "Credit unions are telling us they are willing to put in a limited amount of capital, but the risks to that capital must be limited," said Hampel.
The task force envisions the corporates acting as agents or clearinghouses for CUs to buy Federal Funds from other credit unions or financial institutions; or to serve as agents to facilitate lending between credit unions or to facilitate loan participations.
The new corporate model would act as an agent or clearinghouse for credit unions to access mutual funds or other investments.
"In short, the new model envisions institutions with much smaller balance sheets than existing corporates, acting more as agents than as principles, with investment risks remaining on natural person credit union balance sheets rather than being concentrated in a number of thinly capitalized wholesale institutions," said the task force's report.
The new model would require less capital and thus be easier to create than the current corporate structure, according to Hampel. This is especially important because of the reluctance on the part of credit unions to recapitalize the current corporate structure, he noted.
The task force also recommended that NCUA ease its proposed requirement that all corporate directors be paid executives of natural person credit unions, like CEO or CFOs, and suggested that 20% of board seats be set aside for "outside" directors.
