ALEXANDRIA, Va. — NCUA needs to go further in dialing back restrictions placed on corporate credit unions following the financial crisis, according to many CU executives and experts.
The agency issued a proposal in October that would clarify the restrictions instituted in 2010 and somewhat lessen their regulatory burden. While the industry broadly supported proposed changes, they argue they do not go far enough.
The proposal "is a result of extensive NCUA engagement with corporate credit unions and industry stakeholders about the practical implementation of the comprehensive 2010 corporate credit union rule," said Alicia Nealon, NAFCU's director of regulatory affairs. "While this is a step in the right direction, the NCUA has room and ability to accomplish more in certain areas."
In 19 comment letters sent to the regulator, CUs and their representatives acknowledge why restrictions were first placed on corporate credit unions, after several were taken into conservatorship in 2010 for straying into risky investments outside of their business purpose.
But they say corporates have returned to their primary mission of providing liquidity to credit unions — and more loosening is necessary to help accomplish that goal.
For example, several pointed to a provision of the NCUA's proposal that would change the definition of capital by removing some terms like "adjusted core capital" and "core capital," and replacing it with "Tier 1 capital." But as part of the plan, commenters said corporates could also no longer count certain investments that they receive from members as core capital.
Based on the proposal, "it would appear that corporates have reduced capital when they still have permanent contributing capital from their member credit unions," said Mary Dunn, deputy general counsel CUNA. "I do think the NCUA's intent was a good one, but the issue of permanent contributing capital is an ongoing issue that was brought to the surface by this proposal."
Part of the NCUA's reasoning in changing the definition is so that corporate credit unions would not depend on CU membership to support its core capital. It would also help protect the investments that credit unions made into a corporate if it experiences losses and depletes capital.
The current restrictions instituted in 2010 were already due to phase out certain amounts of perpetual contributed capital in 2016 and again in 2020 if corporates do not build in a certain amount of retained earnings.
But the industry was hoping the NCUA would reconsider the formula when it simplified the definition of capital in the proposal.
"We understand that one of the regulatory objectives is to encourage corporate credit unions to build retained earnings. However, we take exception to the future discounting of perpetual contributed capital (PCC) invested by our credit union members," wrote Todd Adams, chief executive of Alloya Corporate FCU. "Discounting PCC for regulatory capital purposes places corporate credit unions at a competitive disadvantage to other financial firms... A corporate credit union could easily move from a 'well capitalized' to an 'adequately capitalized' position simply because a regulatory date passes and discounting of PCC becomes effective."
The CU community is also pushing for the NCUA to go farther with a provision that would lengthen the amount of time corporates can offer secured liquidity to credit unions from 30 to 120 days.
While the industry supports the extension, many argue it should be longer, or at least more in line with the lengths of time that credit unions typically lend to members.
"A 120-day secured borrowing limit still undermines the ability of corporate credit unions to serve as a source of liquidity, particularly during times of economic distress," wrote PJ Hoffman, regulatory affairs counsel at NAFCU, in a comment letter to the NCUA. "By imposing such a stringent timeframe, NCUA severely restricts a corporate credit union's ability to meet its members' liquidity needs."
NAFCU said NCUA should allow corporates to have up to two-year maturities while groups like the Corporate Credit Union Alliance have recommended one to three years depending on other, matching funding sources.
"It needs to be longer so that corporate credit unions truly have the flexibility to be reliable sources of liquidity for their credit union members," NAFCU's Nealon said.
NCUA said it is still reviewing the comments after the comment period closed on Jan. 5.
"NCUA carefully considers comments from stakeholders and, when appropriate, makes revisions to proposed rules based on those comments," said John Fairbanks, spokesman for the agency. "These technical changes are the most recent refinements to the 2010 corporate rule that has resulted in corporate credit unions diversifying portfolios based on prudent concentration limits, divesting themselves of their riskiest assets, reducing reliance on investment yields and strengthening their capital base, all contributing to a stronger credit union system."