On Friday, the National Credit Union Administration (NCUA) Board announced the corporate credit union “legacy assets” plan that’s intended to address the impaired mortgage-backed securities held by several corporates.
The focus of the plan will be the securitization and sale of these assets into securities which will be backed by the full faith and credit of the U.S. Government. In an earlier closed meeting, the board placed three more corporate credit unions into conservatorship: Members United, Southwest Corporate, and Constitution Corporate.
NCUA will establish “bridge corporates” to ensure the important services by the five conserved corporates (U.S. Central, WesCorp, and the three conserved Friday) to natural-person credit unions regarding payments and settlement are not disrupted.
The board also issued the long-awaited final rule that will dramatically change the regulation of corporate credit unions. The rule is complex and will result in major changes to the entire corporate credit union system.
NCUA Chairman Debbie Matz also said the agency is sending two letters to credit unions on the board’s actions.
In related matters, the board issued for a 30-day comment period a new Interpretive Ruling and Policy Statement for the chartering of corporate credit unions. It also approved a delegation of authority for approval of new activities related to corporate credit union service organizations (CUSOs).
Following are highlights from the board’s actions.
Legacy assets plan
The NCUA Board reviewed the projected Corporate Credit Union Stabilization Fund costs, which are likely to range between $8.3 billion and $10.5 billion based on estimates of the credit losses associated with the troubled or “legacy assets.”
Of this amount, credit unions have already paid about $1.3 billion. The agency said the remaining $7 billion to $9.2 billion to be repaid will be assessed over the remaining life of the Stabilization Fund, which with Treasury’s agreement has now been extended to June 30, 2021.
Agency staff said the current projections were somewhat higher than the range the agency had estimated earlier, and were the result of updating the loss estimates on legacy assets, working with Barclays Capital.
An important feature of the legacy asset plan is that if the ultimate realized credit losses on the securities turn out to be very much lower than current estimates, there could be a recapture of previously impaired capital that had been contributed by credit unions. Agency officials pointed out that under likely future economic conditions, such a recapture is extremely unlikely.
The board also discussed the agency's approach for handling the troubled assets. According to NCUA Deputy Executive Director Larry Fazio, the overall plan for dealing with the corporate credit unions includes three stages:
1. Stabilizing the corporates;
2. Resolving problems in certain corporates and isolating the legacy assets; and
3. Reforming the regulatory regime.
The announcement of the legacy assets plan today “marks the end of the stabilization phase and the beginning of the resolution phase,” Fazio said.
NCUA will isolate the legacy assets from the five conserved corporate credit unions using "good bank/bad bank" structures involving newly chartered “bridge corporates.”
A bridge corporate will act as a “good bank,” and will assume most of the viable assets and liabilities. The impaired assets will remain in the “bad bank.”
The agency has also created a securitization trust (created in consultation with Barclays Capital) using these assets. The new securities created from this structure will be guaranteed by NCUA, backed by the full faith and credit of the U.S. government, and will be accounted for in the Corporate Credit Union Stabilization Fund.
Natural-person credit unions will be permitted to invest in these new securities.
Next: Corporate CU final rule
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:
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
The final rule—like the proposed rule—will establish a maximum two-year limit on the weighted average life (WAL) of a corporate's aggregate assets. Most ALM provisions in the rule will take effect 90 days after the final rule’s publication in the Federal Register.
In addition, the final rule eliminates the proposal’s two cash flow mismatch tests and replaces these with an “asset WAL extension test.”
The final rule’s asset WAL extension test limits a corporate portfolio to an “asset WAL extension to 2.25 years assuming a 50% slowdown in prepayment speeds, regardless of asset type.”
The final rule requires corporate credit union directors to hold the position of CEO, chief financial officer, chief operating officer, or treasurer/manager at a member institution.
The final rule will also:
• Require, upon request, compensation disclosures for the corporate’s most highly compensated employees to the members of the corporate at least annually. The disclosures must include the top five compensated employees for corporates with 41 or more employees, the top four compensated employees for corporates with 31 to 40 employees, and the top three compensated employees for corporates with 30 or fewer employees, as well as the CEO if not already included;
• Require disclosure of material increases in executive compensation related to corporate mergers;
• Prohibit golden parachute payments when the corporate is troubled, undercapitalized, or insolvent, and prohibit certain indemnification provisions regardless of the financial condition of the corporate;
• Require that a majority of corporate boards consist of representatives from natural-person credit unions; and
• Prohibit an individual from serving on the boards of more than one corporate at a time and prohibit an organizational entity from having two or more individual representatives on the board of a single corporate.
Proposed chartering guidelines
The board has adopted a proposed Interpretive Ruling and Policy Statement (IRPS) for the requirements and process for chartering new corporate federal credit unions (corporate FCUs).
NCUA currently has no outstanding guidance on chartering corporate FCUs. The proposed IRPS includes requirements for charter applicants, such as information about a detailed business plan, management, member support, and other required forms.
In addition, the proposed guidance includes NCUA’s standards of review for the feasibility of a new corporate charter and their timelines for action. The proposed guidelines will have a 30-day comment period, and would be used to process any applications during the comment period.
The board also adopted a new policy regarding services of credit union service organizations (CUSO). Generally, corporate credit union services that are preapproved will be investment advisory and brokerage services. Any other services that corporate CUSOs provide must be approved by NCUA.
The board today provided authority to the director of the Office of Corporate Credit Unions to approve, approve with limitations, or disapprove new categories of corporate CUSO business activities. Such categories may include checking and currency services, financial counseling services, business loan origination, and similar services.
The NCUA General Counsel and the director of the Office of Examination and Insurance must concur with the OCCU director’s determination. Requests for categories that are other than these preapproved categories will be referred to the NCUA Board.
MARY DUNN is senior vice president/deputy general counsel for the Credit Union National Association.