SAN DIEGO - Federal regulators are backing off a proposal to clamp down on corporate credit unions, reacting to fierce criticism of plans to restrict the liquidity centers' investments and increase their capital requirements.

Although comments on the original proposal are not due until Aug. 25, National Credit Union Administration Chairman Norman E. D'Amours told an industry meeting here that a revised proposal will be released for another round of comments this fall.

"We need to take a second look at this," he told the National Association of Federal Credit Unions' 28th annual convention last week. "We're not going to write a reg that - in pursuit of safety and soundness - sinks the corporate system."

At a press conference after his speech, Mr. D'Amours said the entire proposal is subject to change, but he refused to discuss specifics.

The NCUA rules are controversial because by cracking down on the amount of risk a corporate may take in its investments, the agency would be restricting the institution's ability to make money. How much a corporate makes determines how much it can pay the credit unions that invest through the institution.

If corporates don't offer competitive returns, credit unions will invest elsewhere. That would hurt corporates, and in turn affect credit unions because 15.2% of their assets are invested in corporates. In fact, about 5,600 credit unions have more invested in corporates than they hold as equity, according to Veribanc Inc., a financial institution rating firm in Wakefield, Mass.

Since the NCUA's proposal came out in April, nearly 1,000 comment letters have been filed, many of which contend that corporate credit unions would be put out of business by the new regulations.

The NCUA's original plan would have required corporates to match the maturities of their assets and liabilities. The goal is to encourage corporates to buy shorter-term assets, which are less susceptible to interest rate risk.

But with greater safety comes lower yields, corporate leaders point out. And it would be tough to raise the capital called for in the new rules while the NCUA also was limiting investment options, corporates contend.

Warren Heller, Veribanc's research director, agreed, describing the original proposal as "a formula for strangulation."

The NCUA, he said, should impose capital minimums on corporates or restrict the liquidity centers' options - but not both.

Corporate leaders attending the convention were thrilled that the NCUA plans to revise its proposal.

"We think it's a good sign," said Richard Johnson, president of Wescorp, the nation's largest corporate credit union. "They've heard from the credit unions, and they've listened."

The government started looking at its corporate regulations nearly a year ago, spurred by the high volume of waivers being requesting from the existing investment limits, according to NCUA Executive Director Karl Hoyle. U.S. Central's $255 million investment in an ailing Spanish bank contributed to regulators' anxieties.

But it was the failure of Capital Corporate Federal Credit Union on Jan. 31 that prompted Congress to demand NCUA action. Cap Corp was taken over by the government after rising interest rates devalued its collateralized mortgage portfolio.

Corporate leaders like Mr. Johnson claim policymakers are overreacting to anomalies. "The corporate system is a huge, monstrous success story," he said, not a smoldering fire that the NCUA must douse.

The NCUA's top corporate regulator, H. Allen Carver, said the liquidity centers perform valuable services, particularly for smaller credit unions. "It's not our intent to put corporates out of business," he assured a NAFCU audience.

But the regulator will continue to raise the bar on corporate performance. "Corporate credit unions must be squeaky clean at all times," said Mr. Carver.

"There is no doubt that corporates need tighter reins on their investment activities and that they need to build capital. The question is how, how much, and when."

Cap Corp's failure is a regulatory embarrassment that the NCUA does not want to repeat.

The Lanham, Md.-based corporate had received the regulators' top performance rating not long before failing. To ensure that does not happen again, NCUA examiners who specialize in corporate regulation have scoured 27 of the 43 corporates in the last year. Mr. Carver told his audience that the NCUA downgraded some institutions two levels on the Camel performance scale and required the dismissal of directors and officers.

"We're taking very forceful action," Mr. Carver said.

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