Rep. Jim Leach, R-Iowa, said he expects that credit unions will be incorporated into legislation regulating the financial industry's use of derivatives, which he plans to introduce in January.
One of the proposals is an interagency commission that would establish comparable standards for derivative products and oversee the market. It also may have regulatory authority over exchange-traded derivatives instruments.
"Any rules for commercial banking would have to apply to credit unions," the ranking Republican on the House Banking Committee said in an interview. "In this kind of area, I doubt credit unions would object to a commonality of regulation."
$9.4 Billion Invested
According to National Credit Union Administration figures, credit union investments in mortgage-backed derivatives have been growing rapidly over the past few years, totaling $9.4 billion, about 8.3% of total investment portfolios.
For credit unions with more than $50 million in assets, the figure is about 10% of portfolios.
Rep. Leach said participation in the derivatives market should be limited to institutions that have solid capital and knowledgable management.
|Limited Involvement'
The committee is currently making inquiries into the involvement of credit unions in the derivatives market, a staff member said.
"Credit unions have a very limited involvement in the derivatives market," said D. Michael Riley, director of examination and insurance for the National Credit Union Administration. "For the most part they're prohibited."
Only corporate credit unions - institutions that invest excess credit union funds and participate in loans - can be permitted to invest in approved financial derivatives for hedging purposes.
Regular federal credit unions can invest in mortgage-backed derivatives that have passed a three-part, high-stress test. They can be used only for hedging.
Trouble Spots
Some problems have appeared.
In July, Tobay Credit Union, Syosset, N.Y., was forced to merge with a larger credit union after mortgage prepayments so eroded the value of Tobay's interest-only strips, the institution lost more than half of its $3.2 million investment.
Mr. Riley said "a couple" of other credit unions have had similar problems, although none as critical. He would not identify the credit unions.
Mr. Riley said at present the agency has no plans for further regulations.
Rep. Leach has been calling on regulators to toughen supervision of the derivatives market. He said he would introduce comprehensive legislation to control the financial service industry's involvement in derivatives, depending on regulators' action.
Rep. Leach's proposals were inspired by a 900-page study by the House Banking Committee that in part focused on the risks posed by the growth of derivatives activity by banks and other financial institutions.
Credit unions were not mentioned in the report because the committee did not know they were involved, a minority staff member said.
"We had asked some Wall Street types and one of the banking agencies if credit unions were involved," the staff member said. "They told us they weren't."
The committee found out the truth when someone at the NCUA requested a copy of the report, the staff member said.
"I asked why he wanted it, and he said some credit unions were into derivatives," the staff member said.
Rep. Leach said credit unions would have been covered in the initial report had the committee known they used derivatives.
Banking Committee staff expect to meet with the National Credit Union Administration soon to discuss the status of the regulation.
"The other banking agencies are behind the market in this area," the staff member said. "I expect they [NCUA officials] will be the same, but we'll see when we meet with them."
