Reactions to NCUA’ s  Final Rule on Corporates

CUs want to support the system, but they might have to look outside for some services.

September 1, 2011

Although NCUA’s final rule on corporate credit unions eliminates some onerous provisions from previous versions, it limits retail credit unions’ choices and increases the need for financial scrutiny. And with fewer corporates left, some credit unions are looking outside the credit union movement for services.

Forming new relationships

Roger Ball, president/CEO of $350 million asset Call Federal Credit Union, Richmond, Va., is on the board of Virginia Corporate Federal Credit Union at least until it merges with Mid-Atlantic Corporate Federal Credit Union.

“Virginia Corporate is structured strictly as a pass-through entity for credit unions,” he explains. “It budgeted with a very narrow margin because we knew it didn’t have to make a profit; it just provided services credit unions needed.”

The corporate’s business plan didn’t call for large reserves or build in high net income. “So with the new requirements, we had to look for a merger partner,” says Ball. “If the system had been designed with risk-based capital requirements, many corporates would remain safe and viable.”

Virginia Corporate, says Ball, “never held toxic or unguaranteed assets.” He’s also comfortable with Mid-Atlantic Corporate. “I’ve dealt with it in the past and I have a lot of respect for the organization,” he says.

NCUA’ s rule on corporates will affect every credit union, he says. “Most have a long history of affiliation with their corporates, some with more than one. They’ve come to rely on them for at least the minimum pass-through services.”

NCUA formerly encouraged credit unions to do business exclusively with corporate credit unions. “We wanted to differentiate our industry by relying on corporates instead of banks,” says Ball. “But now corporates probably won’t be able to provide everything we need. We’ll be forced to go back and form new relationships within the banking industry.”

As corporates merge with other entities and credit unions lose their familiar local ones, they’ll change their habits, he predicts, “Especially small credit unions.

“They never had to worry about due diligence with their corporates,” he adds. “Now, knowing their deposits aren’t fully insured, credit unions will have to perform due diligence on other financial institutions.

“They’ll have to rely on the strength of the financial institutions they deal with, and many credit unions don’t have experience in that area. It might be intimidating, and for smaller credit unions, this whole issue might be the instigator to look for mergers themselves.”

On the plus side, the new requirements will ensure corporate credit unions implement operating efficiencies and keep their profit structures in order. “But they’ll have to change their pricing to meet the capital and retained earnings requirements,” Ball speculates.

“The few corporates left won’t be able to sustain their line-of-credit systems,” he adds. “Many credit unions will have to look for lines in other places. It will be the first time many credit unions will have to worry about the old adage, ‘Don’t put all your eggs in one basket.’”

On an emotional level, says Ball, it’s sad to see something that has worked so well diminished by a few poor business decisions and calculations. Some corporates, he says, got in over their heads in toxic investments and chased returns for competitive reasons.

The industry will rebound, he says. “We’ll come back; we’ll just look different. Maybe it’s time for the whole credit union industry to redefine itself. Positive things will come out of this.”

Next: A little gun-shy

A little gun-shy

Nutmeg State Federal Credit Union, Rocky Hill, Conn., with $331 million in assets, used Constitution Corporate Federal Credit Union until NCUA liquidated it in late 2010. “We lost a lot of money from the capital we had there,” says John Holt, president/CEO, Nutmeg State Federal.

“It was the norm for credit unions to invest in corporates and use their services,” he adds. “If I had to invest paid-in capital now, I wouldn’t use a corporate.”

Holt is concerned about the new, stringent requirements for capital, risk management, and investment. “I wonder if this will trigger higher fees or special assessments.”

There are alternatives to corporates, he ack­nowledges. But as part of the credit union movement, he wants to support the system. “I’m just a little gun-shy because of what’s happened and how they’re being regulated now,” he says.

“I’m happy with our new corporate so far,” he says. “They’re local and they’ve given us good pricing; they appear to be very strong. I have no reason to move at this point, but if they require more risky, expensive things of us, we’d have to reconsider.”

Because NCUA is reg­ulating corporates differently and examining them more closely, Holt believes the risk associated with failures has decreased. “That gives me a secure feeling,” he says.

“They’re following the guidelines and not doing anything to create risk or failure within the industry,” he adds. “From the failures that occurred, the ones left have learned their lessons.”

The credit union movement is healthy, he maintains. “We’ve been very supportive of one another and we’ve gone through a lot. We’ve done a lot of things right compared to banks. We all have to be visionaries and think ahead, so nothing like this will happen again.”

Meticulous monitoring

As Pat Wesenberg sees it, compared with previous versions of the rule on corporates, NCUA made the necessary changes to make the final rule on corporates palatable.

“My biggest concern was that credit unions would be allowed to belong to only one corporate, but they dropped that provision,” says Wesenberg, president/CEO of $178 million asset Central City Credit Union, Marshfield, Wis. “It’s pretty commonplace to belong to more than one corporate; one might have products another doesn’t.”

She’s concerned about the provision assigning more responsibility to corporate credit union directors.

“It might keep some people from wanting to be board members, and natural-person credit unions might limit their staffs’ involvement,” she says. “Oversight has always been part of the responsibility, but when NCUA puts it in the form of a regulation, it holds people to a higher standard and possibly more legal scrutiny.”

Wesenberg also is concerned about retail credit unions being subject to similar rules. “Whenever new rules are imposed on corporates, they trickle down to retail credit unions,” she says. “It’s fear of the unknown, of a greater regulatory burden on top of what we’re already dealing with.

“You can add all the regulations you want, but will it make a difference in the end? If the safety and soundness of member credit unions were always top of mind, we wouldn’t have an issue.”

Central City is now much more meticulous in monitoring its corporate’s financials. “We incurred some huge expenses, so our board is more involved in monitoring events and doing due diligence,” Wesenberg notes.

“Whatever avenue credit unions follow, they have to do their due diligence.”