WASHINGTON -- Drastic changes to the credit union industry's liquidity facilities were recommended Tuesday by a panel of experts.

A committee appointed by the National Credit Union Administration studied the corporate credit union system for four months and compiled a 77-page report that was released at Tuesday's NCUA board meeting.

Among other recommendations, the panel proposed heftier capital levels for corporates, an end to interlocks between trade groups and corporates, and tighter investment regulations.

Inadequate Capital Levels

Capital levels of the corporates are, on average, inadequate, according to the report. Excluding membership shares - which are credit union deposits that corporates consider capital - the average corporate capital level stood at 1.45% as of Jan. 31, 1993, the report said. For U.S. Central the ratio was O.73%.

The committee also argued that corporates should be allowed to accept credit unions from anywhere in the country. As it stands, most corporates deal with only a single state or a group of states.

"Although the additional competition would probably result in mergers among corporates, the surviving corporates would be better capitalized and staffed and better able to serve their constituencies," the report said.

Studying Risk Growth

NCUA is studying corporates, created in the 1970s as liquidity centers for credit unions, because they have increasingly taken on more risk.

The newly created Office of Corporate Credit Unions, headed by H. Allen Carver, will review the report and make recommendations to the NCUA board in September and October.

Agency officials said they wouldn't comment on the report until it has been reviewed, and the panelists have agreed not to comment on it.

The NCUA in March appointed a five-member committee headed by HarOld Black as part of a review of corporates. The review was launched after disclosures in January that U.S. Central Credit Union invested $255 million in a troubled Spanish bank.

Dissecting the Banesto Deal

The committee's report criticized U.S. Central's links with Banco Espanol de Credito, or Banesto, which went back to mid-1993. Investments reached $395 million in August 1993, the report said,.

"Given that Banesto was recognized as an ailing entity in late 1992, it is the opinion of this committee that U.S. Central should not have made any investments in the Spanish bank after that date," the report said.

The committee recommended that the NCUA lift its moratorium on foreign investments by corporates, but toughen its regulation as well.

The maximum amount a corporate can invest in a single foreign entity should be limited to no more than a fraction of primary capital, the report said. Currently the limit is calculated as a fraction of assets.

Better Examiners Needed

As corporates invest in more sophisticated instruments, NCUA examiners need to be better trained, and there needs to be more of them, the report said.

The NCUA also should consult with experts on derivatives as more corporates use them.

The panel said that corporates should be stand-alone institutions. Currently, half of the 42 corporates - including U.S. Central - share top executives with the Credit Union National Association.

"The fundamental issue here is one of the propriety of nonfinancial executives who may have an inherent conflict of interest overseeing the management of the corporate," the report said. "Prudence would argue in favor of a separation between trade association and corporate governance and management."

This recommendation supports a proposal by the agency that would ban management interlocks.

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