Corporate CU final rule
The NCUA Board approved the new corporate credit union final rule, which is more than 250 pages long and will impose extensive changes to the agency’s corporate credit union rules. It’s substantially similar to the proposal, although changes were made to the final version.
The rule addresses key safety and soundness issues including capital, prompt corrective action, investments, asset/liability management, corporate governance and transparency, and CUSO activities.
The final rule will be effective 90 days after publication in the Federal Register, although many of the provisions will be delayed beyond 90 days, as described below.
Following are highlights of the rule.
Corporate credit unions will be subject to stronger capital requirements that are more consistent with those of the banking regulators under Basel I. The current 4% total capital ratio will be replaced with:
- 4% leverage ratio for an adequately capitalized corporate credit union;
- 4% tier one risk-based capital ratio; and
- 8% total risk-based capital ratio.
If a corporate fails to meet any of its minimum ratios, it must develop a capital restoration plan.
The final rule requires that a certain percentage of core capital must be in the form of retained earnings: 100 basis points (bp) after six years and 200 bp after 10 years to be adequately capitalized.
A corporate that doesn’t make progress in reaching these requirements (45 bp after three years) must develop a retained earnings accumulation plan.
These capital requirements will be phased in over 10 years, with the risk-based requirements of 8% total risk-based capital and 4% Tier I capital required by October 2011 (although corporates will be able to use any capital, including retained earnings and member capital, to satisfy this requirement for an initial two-year period).
The final rule will prohibit certain investments, including private label residential mortgage-backed securities (MBS), subordinated securities, collateralized debt obligations, and net interest margin securities.
If a corporate credit union holds a prohibited investment 90 days after the effective date of the rule, it must submit a plan to the Office of Corporate Credit Unions (OCCU) director and must comply with the director’s “directed course of action” if the plan is not approved.
The rule will impose specific concentration limits by investment sector, which includes commercial MBS, agency MBS, student-loan asset-backed securities (ABS), automobile loan/lease ABS, credit card ABS, other ABS, corporate debt obligations, municipal securities, registered investment companies, and an “all others” category that will include new investments.
Some of these limits have been relaxed and others tightened, as compared to the proposed rule.
Next: Asset/liability management