New Corporate Structure Proposal Shifts Business Model

July 16, 2010

The National Credit Union Administration’s (NCUA) proposal to change the corporate system structure will affect corporates’ business model and its expectations of credit unions, according to a panel at The 1 Credit Union Conference, which ended Wednesday in Las Vegas.

Corporates can thrive in the future under a different model. The system will need acceptable business models, and the issue of how legacy assets will be treated needs to be resolved before credit unions will contribute more capital, said Bill Hampel, chief economist at the Credit Union National Association (CUNA).

“Corporates will require both net interest income and fees to cover expenses,” he said, adding the move to a small balance sheet will require more efficient processing and higher fees.

Mike Mercer, president/CEO of the Georgia Credit Union Affiliates, gave a history of the corporate system, saying this past year’s crisis is the third encountered by the corporate system.

“NCUA will require corporates to have a smaller default rate and confine interest-rate risk. It will tolerate very little liquidity risk,” he said.

Everything will be off the balance sheet, but risk will transfer from the corporates to credit union balance sheets. “Examiners will be more focused on how you invest and balance your risk,” Mercer said.

Brad Miller, CEO of Southeast Corporate Federal Credit Union and former CEO of the Association for Corporate Credit Unions, said the challenge for corporate credit unions will be quantifying their value to credit unions. Corporates will need to focus on effectiveness and efficiency.

Miller would favor a collaborative business model but said the system is “so dynamic it would be hard to collaborate.”

However, centralizing some back office functions would improve efficiency. If U.S. Central survives, it wouldn’t be as a wholesale credit union but as a retail institution.

“The big issue with the business model is that we moved a lot of risk to U.S. Central but we didn’t move enough capital,” Miller said. An even bigger issue is legacy or “toxic” assets. “We’re still seeing losses.”

Frank Mitchell, president of Allied Credit Union, Stockton, Calif., said he would like to see a credit union-owned solution to the problem.

“For most, having the Fed settle is not an alternative,” he said. “You can’t separate settlement from short-term investments and short-term liquidity.”

The proposal, Mitchell added, “takes out U.S. Central. Credit unions that depend on U.S. Central would have the capital but no infrastructure to provide settlement and processing.”

The ramifications, said the panel, are:

  • The expectation of increased internal investment expertise;
  • Concentration of risk will flow to natural person credit unions, especially to those with high concentrations of investments through corporates; and
  • Corporates will be treated as a third party, requiring vendor due diligence.

CUNA Associate General Counsel Mary Dunn moderated the panel.