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).
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:
osed_regs.html. Follow the instructions for submitting comments.
? E-mail: Address to firstname.lastname@example.org. 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
website 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 9:00 a.m.
and 3:00 p.m. To make an appointment, call (703) 518-6540 or send an e-mail
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.
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 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
? 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
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 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