The National Credit Union Administration said it will neither support nor fight proposed legislation that includes stiffer guidelines on how credit unions and other banking institutions can use derivatives.
Agency officials met with staff members of the House Banking Committee on Dec. 15 to discuss use of the controversial instruments by credit unions.
"We find that perfectly fine," said Robert Loftus, director of public and congressional affairs for the NCUA, who attended the meeting. "We're not taking a proactive stance one way or another. It's just not an issue that affects most credit unions."
Rep. Jim Leach, ranking Republican on the House Banking Committee, said that he plans to introduce legislation in January to regulate the banking industry's involvement with derivatives. Credit unions would be covered by the legislation.
Credit unions are involved in derivatives, but only to a limited extent. According to the agency, credit union investments in mortgage-backed derivatives total $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%.
But only corporate credit unions, which invest excess funds and participate in loans, can be permitted to use financial derivatives - the products that concern Rep. Leach.
Currently two corporates - U.S. Central Credit Union, Overland Park, Kan., and Dallas-based Southwest Corporate Federal Credit Union - invest in such products, said a banking committee staff member.
Financial derivative investments at U.S. Central have a notional value of about $4.5 billion with a $50 million exposure, said the staff member.
Southwest Corporate has about $40 million invested in the products. Another corporate has applied for approval to use financial derivatives, and a decision could be reached within a month, Mr. Loftus said.
All derivatives used by credit unions must pass a high-stress test and also must be used only for hedging purposes. Earlier this year the NCUA began requiring credit unions to disclose all mortgage derivatives holdings in call reports.
Last month the committee released a 900-page study that in part focused on the risks posed by the growth of derivatives activity by banks and other financial institutions. Credit unions were not included in the report because the staff was not aware that they were involved.
The House Banking staff is not made up of "credit union experts," the staff member said, but it is satsfied for now with the regulators' stance.
"They seem like no-nonsense people who have the examiner mentality of |if we don't understand it, we'll ban it,'" the staff member said. "The impression they gave us is that they're not particularly thrilled that credit unions are getting involved" with derivatives.
Rep. Leach, of Iowa, has said he wants only well-capitalized and well-managed institutions to use the products.
One of Rep. Leach's proposals calls for 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.
The NCUA would enforce compliance with any future regulation, the staffer said.