NORTH HIGHLANDS, Calif.-After the devastating collapse a number of the largest corporate credit unions and NCUA's new rules for rebuilding many corporates, the question now is whether the credit union community is safer as a result.
The answer is the subject of spirited debate, suggest several sources, many of whom are split on whether CU investments are better protected today, with some stating NCUA's new corporate guidelines have created greater security moving forward, while others take the exact opposite view, arguing in one case the agency has "created a monster."
A number of analysts contend investment restrictions have turned corporates into item processing and settlement centers as opposed to investment houses, and that has offloaded responsibility for investments onto the shoulders of natural-person CUs. There are concerns that credit unions, especially smaller to midsize CUs, do not have the expertise in-house to manage a growing investment portfolio, nor the scale to get the best deals from investment brokers.
Cause For Worry?
This is cause for worry, some say, especially at a time when lending is tough and liquidity is high. Henry Wirz, CEO of the $1.9-billion SAFE CU here, contends NCUA made the wrong decision to strip the corporates of much of their investment authority. "NCUA made a horrible mistake with the corporates they will come to regret," said Wirz. "With the new corporate structure there are really no investment services, they are largely item processing, remittance, and settlement operations."
Before the new NCUA guidelines many credit unions relied on the investment expertise within the corporate system, but now those types of decisions are being made by CEOs, all the way down to the smallest-size credit unions, pointed out Wirz. "Investment decisions are being made by folks who have handled investing infrequently. The credit unions are now buying from brokers who are motivated by commission, and many credit unions are doing it at a disadvantageous scale and price. I think we have created a monster."
Wirz also believes the new structure makes it more difficult for NCUA to oversee CU investments. "At one time corporates had 40% to 50% of natural-person credit union investible assets. Now the NCUA is faced with credit unions going to third parties that are farther away from effective NCUA regulation and have different motives than the corporate system."
Both Sides of the Argument
Tom Manley, Partner at ALM First Financial Advisors, Dallas, is on the fence, citing both advantages and disadvantages with the new corporate guidelines.
Manley believes NCUA got rid of the one main aspect that contributed to the collapse of the corporate system-the competitive environment that led corporates "down the path of one-upmanship" that eventually resulted in "disastrous asset allocation and security selections. The industry today is more stable and less risky."
On the other hand, Manley is concerned with having more natural-person CUs taking greater responsibility for managing their investments. "We have seen, first-hand, credit unions coming to us after the fact telling us they have been severely mistreated by the broker dealer industry."
Manley urged CUs taking greater control of their investing to deal with more than one broker, constantly measure the performance of one broker against another, and also keep a close eye on balance sheet duration risk. "Measuring investment risk and balance sheet risk go hand in hand."
'Giant Screaming Need'
Matt Davidson, EVP at the $1.3-billion Kern Schools FCU in Bakersfield, Calif., who led the effort to create and capitalize United Resources Credit Union out of Western Bridge, offers a couple of views. He said the credit union community is safer now due to the restrictions on corporate investing. "There is certainly less risk today. Corporates are more restricted in what they can buy and how they buy it. Plus, everyone is simply more risk aware. And, the instruments natural-person credit unions are allowed to invest in are not risky."
Yet with the corporate system now focused primarily on item processing and settlements, said Davidson, there is a "giant screaming need for investment expertise. Before a $100-million credit union could buy investments through their corporate, which despite what happened, had skilled people. That gave natural-person credit unions a lot of comfort. It was someone with expertise and someone who clearly understood credit unions. But not all credit unions have the expertise to build a portfolio of investments and they have to find help somewhere. Finding a broker off the street-therein lies the risk."
Risk (And Return) Free
Under the new corporate system that risk isn't there, insists Bruce fox, EVP and chief investment officer for Catalyst Corporate FCU, Plano, Texas, who admits, though, he is concerned about the future. "There has been a reduction in dollar amounts of overnight investments credit unions have at the corporates. We believe most of those funds have rolled off corporate balance sheets and ended up at the excess reserve accounts at the Federal Reserve Bank."
That makes things pretty risk-free today, noted Fox. But when the Fed, which is currently paying 25 BPs on overnights, stops paying interest on excess reserve balances, that is when risk may become an issue, advised Fox. "The big question is where do the funds go then? Most will not likely flow back onto the corporates' balance sheets because of the corporates' capital requirements. The funds will flow into other investment options."
Fox said Catalyst, which was awarded the remnants of WesCorp's business, is sweeping about $6.5 billion of its members' overnight balances to the Fed, and is preparing for when the Fed stops paying interest on excess reserve balances, working with money managers to offer money markets that invest in trustworthy agency securities that provide a low-risk overnight money investment option.
Dennis Dollar, principal at Dollar Associates, Birmingham, Ala., and the former chairman of NCUA, thinks the credit union community is in a much safer place today, due to the corporate crisis making the industry warier of investment safety. "In an ironic way, the corporate crisis has resulted in a safer and sounder credit union system-not so much because of the new corporate rules, though substantive, but more so a result of the enhanced due diligence both natural person credit unions and corporate credit unions are taking in regards to their relationships and investment authorities."
The View From NCUA
Larry Fazio, NCUA director of examination and insurance, emphasized to Credit Union Journal that if the corporate guidelines have produced a business model that has some credit unions turning outside the corporate system for investing, the vehicles natural-person CUs are allowed to invest in are safe. "Natural-person credit unions' investment authority has not changed," reminded Fazio. "Their investment avenues are very conservative."
Scott Hunt, NCUA director of the Office of Corporate CUs, challenged whether the new guidelines have altered the market, noting there are a number of corporates that have not changed their business model. "Yes, there are more restrictions on certain concentration risks. But besides the private label mortgage backed securities and CDOs, we have not really narrowed the corporates' universe of investments."