Deborah Matz had called the monthly meeting of the NCUA board to consider several proposals (see full agenda), including the highly anticipated release of the detailed corporate regulatory proposal. Weighing in at a modest 253 pages, only summaries of the new corporate rules were available at the meeting. However, the full proposal (Number 1 on the list) is currently available on CreditUnionsRising.com (the .pdf is only available on NCUA’s site for 30 days, so we are hosting the full document so you will have continued access to it).
In the NCUA Board room, there was standing room only. Despite the palpable sense of anticipation of the new corporate rules, there was little discussion, let alone debate. The board unanimously approved what Matz called “a very well thought-out rule that comprehensively reforms the corporate system.” Instead, the responsibility to probe and analyze the proposal was placed squarely on credit unions.
This running theme was perhaps best crystallized by Gigi Hyland: “Natural person credit unions must take a look at this rule and tell us what they want the corporate credit union system to look like.” Credit unions have 90 days to comment on the proposed changes. Matz said that the NCUA will be hosting several town hall meetings and webinars throughout January and February, as well as accepting letters and written statements.
What Is in the Proposal
More detailed analysis will be available as time progresses; this is meant to introduce you to the full proposal. Also, please join the discussion to learn more about the corporate proposal and how your credit union may want to respond (note the discount for Credit Unions Rising participants). The following is a brief summary of the key changes to the existing corporate rule.
|4% minimum “leverage” ratio
||5% minimum “leverage” ratio
|4% tier one risk-based capital ratio
||6% tier one risk-based capital ratio
|8% total risk-based capital ratio
||10% total risk-based capital ratio
|45 basis points of retained earnings after three years
|100 bps of retained earnings after 6 years
||150 bps of retained earnings after 6 years
|200 bps of retained earnings after 10 years
||250 bps of retained earnings after 10 years
- Failure to meet the three minimum capital ratios triggers a capital restoration plan.
- Failure to meet retained earnings milestones triggers compliance with retained earnings accumulation plan.
- Investing in collateralized debt obligations (CDOs) and net interest margin (NIM) securities is prohibited.
- 90% of all investments must have been rated by at least two Nationally Recognized Statistical Rating Organizations (NRSRO). “A-” is the lowest possible rating (taken from the lower of the NRSRO ratings required) for corporate with expanded investment authority. To qualify for expanded investment authority, the corporate must maintain greater than a 6% leverage ratio.
- Imposes concentration limits by investment sector, generally the lower of 500% of capital or 25% of assets for more risky sectors, and the lower of 1000% capital or 50% of assets for less risky sectors.
- Corporate credit unions must perform Net Economic Value (NEV) modeling by shocking rates by up to 300 bps.
- Average life span between assets and liabilities is dependent on capital levels and the NEV modeling, but generally the range will be between a 2 and 4 month difference.
- Prohibits accepting investments from any entity that would put that entity’s total investments over 10% of the corporate moving daily average net assets.
- Corporate board members must be either a CEO, CFO, or COO.
- Board members are limited to six consecutive years of board service.
- Rules for board members apply during (re)election, not to sitting board members.
- The corporate credit union must annually disclose compensation to senior executive officers and directors.
- Prohibits gold parachutes, defined as “payments made to an institution affiliated party (IAP) that are contingent on the termination of that person’s employment and received when the corporate making the payment is either troubled, undercapitalized, or insolvent.”
What’s Not in the Proposal
- A plan to deal with current investment and OTTI losses. As Hyland explained, “Legacy assets are the 800 pound gorilla in the room.” The board stressed, however, that selling these assets in the current environment is not an option. The challenge, as they saw it, was separating these troubled assets from corporate books.
- Discussion of how these rules enhance the corporate system’s ability to compete, specifically in regards to function as a lending and investment vehicle. Justification of the new proposals thus far relies on general assertions of “safety and soundness.” Each corporate will likely be releases assessments regarding their ability to build retained earnings under this new set of regulations.
- A clear vision for the corporate system. This absence of vision was signified by the lack of discussion at the meeting itself, and as Matz explained, “We’ve made a point of ensuring the proposed rule is not prescriptive.” This statement was made specifically in reference to the number of corporate credit unions and the services to be offered by corporate, and that these decisions will be up to credit unions. The final corporate system will be comprised of those corporates that a) survive these additional rules and b) are selected by NPCUs to be (re)capitalized.
This is an opportunity (or mandate depending on your perspective) for your credit union to determine the future of the corporate system. The process begins with this 90 day comment period. After the finalized set of rules is passed, each credit unions will decide if and how to capitalize the corporate system.
What would be the kind of corporate that would cause your credit union to invest?