[Federal Register: February 4, 2009 (Volume 74, Number 22)]
[Proposed Rules]
[Page 6004-6007]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr04fe09-12]
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NATIONAL CREDIT UNION ADMINISTRATION
12 CFR Part 704
RIN 3133-AD58
Corporate Credit Unions
AGENCY: National Credit Union Administration (NCUA).
ACTION: Advance notice of proposed rulemaking and request for comment
(ANPR).
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SUMMARY: In the light of current economic circumstances affecting the
U.S. economy and, in particular, the financial sector, NCUA is
evaluating and reconsidering the role corporate credit unions currently
play in the credit union system, including corporates' membership
structure, size, and types of services they offer. NCUA is also
considering whether to amend its regulation governing corporate credit
unions to clarify or revise current provisions, including those related
to: Capital; permissible investments; management of credit risk and
liquidity; and corporate governance. NCUA seeks comment on these issues
and any others commenters think NCUA should consider.
DATES: Comments must be received on or before April 6, 2009.
ADDRESSES: You may submit comments by any of the following methods
(Please send comments by one method only):
Federal eRulemaking Portal: http://www.regulations.gov.
Follow the instructions for submitting comments.
NCUA Web Site: http://www.ncua.gov/
RegulationsOpinionsLaws/proposed_regs/proposed_regs.html. Follow the
instructions for submitting comments.
E-mail: Address to regcomments@ncua.gov. Include ``[Your
name]--Comments on Advanced Notice of Proposed Rulemaking for Part
704'' in the e-mail subject line.
Fax: (703) 518-6319. Use the subject line described above
for e-mail.
Mail: Address to Mary Rupp, Secretary of the Board,
National Credit Union Administration, 1775 Duke Street, Alexandria,
Virginia 22314-3428.
Hand Delivery/Courier: Same as mail address.
Public Inspection: All public comments are available on the
agency's Web site at http://www.ncua.gov/RegulationsOpinionsLaws/
comments as submitted, except as may not be possible for technical
reasons. Public comments will not be edited to remove any identifying
or contact information. Paper copies of comments may be inspected in
NCUA's law library at 1775 Duke Street, Alexandria, Virginia 22314, by
appointment weekdays between 9 a.m. and 3 p.m. To make an appointment,
call (703) 518-6540 or send an e-mail to OGCMail@ncua.gov.
FOR FURTHER INFORMATION CONTACT: Ross Kendall, Trial Attorney, Office
of General Counsel, at the above address or telephone: (703) 518-6540,
or David Shetler, Senior Corporate Program Specialist, at the above
address or telephone (703) 518-6640.
SUPPLEMENTARY INFORMATION:
A. Background
The Federal Credit Union Act (Act) authorizes natural person
federal credit unions (FCUs) to invest in shares or deposits of any
central credit union (corporate credit union). 12 U.S.C. 1757(7)(G). A
corporate credit union is an organization, chartered under the Act or
under applicable state law as a credit union that receives shares from
and provides loan and other services primarily to other credit unions.
12 CFR 704.2. Historically, corporate credit unions have fulfilled an
important role in the credit union industry and have provided credit
unions with payment and clearing services, including access to wire
transfer facilities and automated clearing house transactions.
Corporate credit unions have also provided investment services,
enabling smaller credit unions to achieve economies of scale and access
to greater market returns otherwise unavailable to them. Corporate
credit unions have been an important source of liquidity for credit
unions through short and medium term credit facilities, and have served
as agents on behalf of NCUA's Central Liquidity Facility (CLF) in
connection with loans funded by the CLF. Corporate credit unions have
also provided other operational services, such as coin and currency
services and safekeeping of investments.
There are currently twenty-eight corporate credit unions serving
the nation's approximately 7,900 credit unions. As with all credit
unions, corporate credit unions are organized as cooperatives, owned by
their members and responsive to their needs, enabling
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members to receive access to necessary products and services at
affordable rates. They provide a level of expertise and market presence
that would be unavailable to most of their members if required to rely
solely on their own resources.
B. Current Economic Climate and Remedial Measures Taken
Over the last year, many corporate credit unions have experienced a
dramatic reduction in the value of their investment portfolios. These
reductions, coupled with, in some cases, the virtual freeze-up of the
market for trading in certain types of investment securities, have
undermined the stability of the corporate credit union system.
Simultaneously with the issuance of this Advance Notice of Proposed
Rulemaking, which is designed to identify issues that may have
contributed to the current state of affairs and to solicit comment and
ideas on how to address them as the industry moves ahead, the NCUA
Board has taken several actions with a more immediate, remedial impact,
designed to stabilize the industry and maintain confidence in the
corporate system. These actions include the following:
An infusion of $1 billion in capital into U.S. Central
Federal Credit Union, the corporate system's wholesale credit union, by
the National Credit Union Share Insurance Fund (NCUSIF); and
A temporary NCUSIF guarantee of all member shares, for any
corporate credit union that decides to participate in a voluntary
guarantee program offered by NCUA.
The Board believes these extraordinary measures, which are mandated
by the exigent economic conditions affecting the country, will help
stabilize the corporate credit union system and enable credit unions
return to their primary mandate, which is to provide affordable
financial services to their members. The Board believes that
identifying and addressing the issues discussed in this ANPR will help
continue to assure stability and confidence in the corporate credit
union system in the future.
C. Issues for Consideration
Notwithstanding the successful role that corporates have played in
the credit union sector, events of recent months have highlighted
several areas in which re-evaluation is appropriate and necessary. As
set out more fully below, these include some fundamental aspects
concerning the structure, role and services offered by corporate credit
unions to the credit union industry.
1. The Role of Corporates in the Credit Union System
Recent events have highlighted structural vulnerabilities in the
corporate credit union system. NCUA is considering whether
comprehensive changes to the structure of the corporate system are
warranted. Possible approaches the agency is considering include
eliminating the second or wholesale tier from the corporate system,
modifying the level of required capital, isolating payment services
from the risks associated with other lines of business, determining
which product and service offerings are appropriate for corporates,
requiring a restructure of corporate boards, and tightening or
eliminating the expanded investment authority that is currently
available to corporates.
Payment system. Some of the questions and issues arising in this
context, on which the Board is seeking comment, include matters such as
whether payment system services should be isolated from other services
to separate the risks. If so, what is the best structure for isolating
these services from other business risks? Specific comment is solicited
concerning whether, for example, it would be better to establish a
charter for corporate credit unions whereby a corporate's authority is
strictly limited to operating a payment system, with no authority to
engage in other services, such as term or structured investments.
Additionally, a separate charter may be available for corporate credit
unions that want to engage in providing investment services. Another
alternative would be for NCUA to establish distinct capital
requirements for payment systems risk and the risks of other corporate
services. NCUA could also require that a legal and operational firewall
be established between payment system services and other services. In
connection with this topic, comment is also sought on the question of
whether there is sufficient earnings potential in offering payment
systems to support a limited business model that is restricted to
payment systems services only.
Liquidity and liquidity management. Historically, the primary role
of corporate credit unions has been to provide and ensure liquidity.
Corporate investments were made with an eye towards ensuring funds
would be available to meet members' short-term liquidity needs. Recent
events underscore the need to assure a corporate properly considers its
investment position relative to its cash flow needs. The Board
recognizes and understands that providing liquidity for the credit
union system is one of the principal purposes of the corporate credit
union network. One question for consideration and comment is whether
liquidity ought to be considered a core service of the corporate
system, and if so, what steps should be taken, and by whom, to preserve
and strengthen corporates' ability to offer that service? For example,
should NCUA consider limiting a corporate's ability to offer other
specific types of products and services in order to preserve and defend
the liquidity function? What specific types of products and services
should corporates be authorized to provide?
NCUA is considering additional cash flow measuring requirements to
assist corporates in achieving and maintaining proper liquidity
management. In this respect, comment is specifically solicited on the
question of whether NCUA should add aggregate cash flow duration
limitations to Part 704. If so, commenters are invited to describe how
this requirement should be structured, and also to identify how such
limitations would benefit liquidity management. Finally, comment is
solicited on the question of what cash flow duration limits would be
appropriate for corporate credit unions, particularly in an evolving
interest rate market with previously unseen credit risk spreads.
Field of Membership Issues. NCUA also seeks comment on whether and
how to restructure the corporate credit union system. For example,
despite its intention of fostering competition, NCUA's decision to
allow corporates to have national fields of membership (FOMs) may have
resulted in significant, and unforeseen, risk taking. For example,
corporates have competed with each other to offer higher rates, and
have done so through the accretion of credit and marketability risks.
To address this development, should the agency return to defined FOMs,
for example, state or regional FOMs?
Expanded Investment Authority. At present, Part 704 provides for an
option by which corporates meeting certain criteria can qualify for
expanded investment authority. For example, a corporate meeting the
criteria set out under Part One of the expanded authority is allowed to
purchase investments with relatively lower credit ratings than
otherwise permissible under the rule. NCUA seeks comment, first, as to
whether the need for expanded authorities continues to exist. If so,
should NCUA modify the procedures and qualifications, such as higher
capital standards, by which corporates currently qualify for expanded
authorities? If so, what should
[[Page 6006]]
the new standards be? Should NCUA reduce the expanded authorities
available? If so, which ones? Alternatively, should any of the limits
in existing expanded authorities be reduced or increased? If so, which
ones? Once granted, should NCUA require periodic requalification for
expanded authorities? If so, what should be the timeframe?
Structure; two-tiered system. Over time, the corporate system has
evolved into two tiers: a retail network of corporates that provide
products and services to natural person credit unions, and a single,
wholesale corporate that exclusively services the retail corporates.
NCUA solicits comment about whether the two-tier corporate system in
its current form meets the needs of credit unions. Specifically, NCUA
seeks input from commenters about whether there is a continuing need
for a wholesale corporate credit union. If so, what should be its
primary role? Should there be a differentiation in powers and
authorities between retail and wholesale corporates? In considering
these issues, commenters are specifically asked to consider whether the
current configuration results in the inappropriate transfer of risk
from the retail corporates to the wholesale corporate. Commenters
should also address whether, assuming the two-tiered system is
retained, capital requirements and risk measurement criteria (e.g., NEV
volatility), as well as the range of permissible investments, for the
wholesale corporate credit union should be different from those
requirements that apply to a retail corporate credit union.
2. Corporate Capital
NCUA is considering revising various definitions and standards for
determining appropriate capital requirements for corporate credit
unions. For example, the agency could establish a new required capital
ratio consisting only of core capital excluding membership capital
accounts as a component of regulatory capital; the agency could also
determine to increase the required capital ratio to more than four
percent. The agency could also establish a new ratio based on risk-
weighted asset classifications, which could include some form of
membership capital. These changes would bring the corporate capital
requirements more into line with standards applied by other federal
financial regulators, such as the Comptroller of the Currency and the
Federal Deposit Insurance Corporation (recognizing, however, that there
are other accounting differences that apply with respect to the
calculation of regulatory capital for banks). Another issue under
consideration is whether to require a certain level of contributed
capital from any natural person credit union seeking either membership
or services from a corporate.
Core capital. The Board is considering several issues relating to
the agency's approach to core capital (i.e., the traditional ``tier one
capital'' definition as used by the several federal financial
institution regulators). Under the current rule, core capital is
defined as retained earnings plus paid-in capital. 12 CFR 704.2.
Comment is invited concerning whether NCUA should establish a new
capital ratio that corporates must meet consisting only of core
capital, and if so, what would be the appropriate level to require.
Commenters should offer their view concerning what actions are
necessary to enable corporates to attain a sufficient core capital
ratio as described above, as well as their thought about what would be
an appropriate time frame for corporates to attain sufficient capital.
The Board invites comment also on the question of what is the
appropriate method to measure core capital given the significant
fluctuation in corporate assets that occur. Commenters are invited to
offer their view on the correct degree of emphasis that ought to be
placed on generating core capital through undivided earnings. Finally,
NCUA Is considering whether to require that a corporate limit its
services only to members maintaining contributed core capital with the
corporate. Commenters are invited to react to that idea, and to offer
any other suggestions or comments relative to the issue of core capital
for corporates.
Membership capital. The Board is also considering several issues
involving membership capital. 12 CFR 704.3(b). Issues under
consideration and for which comment is sought include whether NCUA
should continue to allow membership capital in its current
configuration, or should the agency eliminate or modify certain
features, such as the adjustment feature, so that membership capital
meets the traditionally accepted definition of tier two capital. Other
questions include whether to tie adjusted balance requirements, as set
out currently in Sec. 704.3(b)(8), only to assets, as well as whether
to impose limits on the frequency of adjustments. The agency is
considering whether to require that any attempted reduction in
membership capital based on downward adjustment automatically result in
the account being placed on notice, within the meaning of current Sec.
704.3(b)(3), so that only a delayed payout after the three-year notice
expires is permissible. Comment is also sought on whether to require
that any withdrawal of membership capital be conditioned on the
corporate's ability to meet all applicable capital requirements
following withdrawal. Comment is invited on all these issues and on any
revisions NCUA should consider for the definition and operation of
membership capital.
Risk-based capital and contributed capital requirements. Comment is
solicited with respect to the following issues pertaining to risk-based
capital and contributed capital requirements. Should NCUA consider
risk-based capital for corporates consistent with that currently
required of other federally regulated financial institutions? What
regulatory and statutory changes, if any, would be required to
effectuate such a change? Should a natural person credit union be
required to maintain a contributed capital account with its corporate
as a prerequisite to obtaining services from the corporate? Should
contributed capital be calculated as a function of share balances
maintained with the corporate? What about using asset size?
3. Permissible Investments
NCUA is considering whether the corporate investment authorities
should be constrained or restricted. Presently, corporates have the
authority to purchase and hold investments that would not be
permissible for natural person FCU members under Part 703 (or, in some
cases, outside of what is authorized for a state chartered credit
union). This increases a corporate member's exposure to these risks
commensurate with their level of investment in the corporate. Questions
on which comment is solicited in this context include whether NCUA
should limit corporate credit union investment authorities to those
allowed for natural person credit unions. NCUA is also considering
whether to prohibit certain categories of, or specific, investments,
for example: collateralized debt obligations (CDOs), net interest
margin securities (NIMs), and subprime and Alt-A asset-backed
securities. Comment is solicited on that issue, as well as on whether
NCUA should modify existing permissibility or prohibitions for
investments.
4. Credit Risk Management
The reliability of credit ratings for investments has become more
questionable in light of events in the financial industry and the
current absence of regulatory oversight for
[[Page 6007]]
rating organizations. Consequently, NCUA is considering curbing the
extent to which a corporate may rely on credit ratings provided by
Nationally Recognized Statistical Rating Organizations (NRSROs).
Comment is requested on whether NCUA should require more than one
rating for an investment, or require that the lowest rating meet the
minimum rating requirements of Part 704. NCUA also solicits comment on
whether to require additional stress modeling tools in the regulation
to enhance credit risk management.
Several specific aspects of this issue are under consideration, for
which comment is solicited, including whether Part 704 should be
revised to lessen the reliance on NRSRO ratings. Commenters are invited
to identify any other changes they believe may be prudent to help
assure adequate management of credit risk. In this respect, commenters
should consider whether Part 704 should be revised to provide specific
concentration limits, including sector and obligor limits. If so, what
specific limits would be appropriate for corporate credit unions?
Comments are also solicited on the question of whether corporates
should be required to obtain independent evaluations of credit risk in
their investment portfolios. If so, what would be appropriate standards
for these contractors? Another issue under consideration is whether
corporates should be required to test sensitivities to credit spread
widening, and if so, what standards should apply to that effort.
5. Asset Liability Management
In a previous version of its corporate rule, NCUA required
corporate credit unions to perform net interest income modeling and
stress testing. Because one of the problems leading to the current
market dislocation is a widening of credit spreads, the agency is
considering re-instating this requirement. Alternatively, the agency
may consider some form of mandatory modeling and testing of credit
spread increases. Comment is solicited on whether NCUA should require
corporates to use monitoring tools to identify these types of trends,
including specifically comments about tangible benefits, if any, that
would flow from these types of modeling requirements.
6. Corporate Governance
The sophistication and far-reaching impact of corporate activities
requires a governing board with appropriate knowledge and expertise.
NCUA is considering minimum standards for directors that would require
a director possess an appropriate level of experience and independence.
The agency is also considering term limits, allowing compensation for
corporate directors, and requiring greater transparency for executive
compensation. Comment is sought on all these issues.
In addition, commenters are invited to respond to the question of
whether or not the current structure of retail and wholesale corporate
credit union boards is appropriate given the corporate business model.
Should NCUA establish more stringent minimum qualifications and
training requirements for individuals serving as corporate credit union
directors? If so, what should the minimum qualifications be? NCUA is
also considering whether to establish a category of ``outside
director,'' i.e., persons who are not officers of that corporate,
officers of member natural person credit unions, and/or individuals
from entirely outside the credit union industry. Commenters should
offer their view on whether that approach is wise, and, if so whether
NCUA should require that corporates select some minimum number of
outside directors for their boards. Should a wholesale corporate credit
union be required to have some directors from natural person credit
unions? Comment is sought on whether NCUA should impose term limits on
corporate directors, and, if so, what the maximum term should be.
Comment is also sought on whether corporate directors should be
compensated, and, if so, whether such compensation should be limited to
outside directors only. Another issue under consideration, for which
reaction from commenters is sought, is whether NCUA should allow
members of corporate credit unions greater access to salary and benefit
information for senior management.
Request for Comments
The NCUA Board invites comment on any of the issues discussed above
including specifically if NCUA's regulations should be amended to
address the issues discussed in this ANPR. NCUA also welcomes comment
on any other relevant issues pertaining to corporate credit unions that
have not been addressed in this ANPR.
By the National Credit Union Administration Board on January 28,
2009.
Mary F. Rupp,
Secretary of the Board.
[FR Doc. E9-2292 Filed 2-3-09; 8:45 am]
BILLING CODE 7535-01-P