The National Credit Union Administration's plan to rein in the industry's liquidity centers could kill some institutions and wound others, industry leaders said.
As written, the proposal would require corporate credit unions to boost capital while restricting their investment powers.
That double whammy could render larger corporates uncompetitive and force smaller corporates to seek merger partners.
David Daetwyler, chief executive of Alabama Corporate Credit Union, said the proposal "stinks."
"It's a work of idiocy," he said.
"One word: overkill," said William F. Hampel Jr., chief economist for the Credit Union National Association. "As currently written, if it isn't changed at all, I'm not sure corporates would be able to survive."
The April proposal, spurred by the failure of Capital Corporate Federal Credit Union, is far-reaching, but the changes considered most important affect corporate investments and capital.
The proposal's 60-day comment period runs through June 26.
The plan would require corporates to move to a "matched book" investment portfolio, in which investments are funded with deposits of similar maturity. Some corporates have moved toward mismatching in order to get higher yields.
The plan also would limit the amount of certain investments to a percentage of primary capital. For instance, corporates could invest an amount no greater than 25% of their primary capital in large, highly rated domestic banks; no such ceiling exists now.
Debt obligations, asset-backed securities, and privately issued collateralized mortgage obligations would be limited to 25% of capital. Currently, the limit is 5% of assets.
As far as capital goes, corporates would need to reach a 4% primary- capital-to-assets ratio by Jan. 1, 1998, as opposed to the current system where regulators measure capital only as a percentage of risk-weighted assets. Because the bulk of corporate investments are virtually risk free, meeting a risk-adjusted ratio requires less capital.
Several corporate officials said they would be hard pressed to amass capital through retained earnings when stricter investment regulations are likely to lower retained earnings.
"It's ludicrous to set such a short time frame to build capital when they tie your hands 40 ways from Sunday," Mr. Daetwyler said.
"I think we can survive it here in Alabama, but we'd have to perform some ridiculous things that would hurt our effectiveness," he added.
"The reserving is going to virtually double the capital requirements of corporates in a two-and-a-half-year period," said Don Finn, chief operating officer of Mid-States Corporate Federal Credit Union, Naperville, Ill. "The only way to accomplish that is through shrinkage of corporate credit union assets."
The regulation also would limit corporates' borrowing authority. The amount a corporate could borrow would be limited to 10 times its capital or 50% of deposits and capital, whichever is less. Under the current system a corporate can borrow the greater amount.
Mr. Finn said that would limit a corporate's role as a liquidity source for cash-strapped credit unions.
Constitution State Corporate Credit Union chief executive Raymond F. Dowling thinks some of his colleagues might be a bit paranoid.
"It certainly isn't the death knell of corporate credit unions," he said. "It simply requires the restructuring of some portfolios and strategies currently being used."