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November 19, 2009 - The National Credit Union Administration (NCUA) Board approved a proposed rule November 19 that provides a new framework for the governance, operations and capital standards of corporate credit unions.
NCUA’s proposed rule makes changes to five main areas: corporate credit union capital, investments, asset liability management, governance and credit union service organization (CUSO) activities. A task force of NASCUS state regulators worked closely regulator-to-regulator with NCUA senior staff throughout the process.
“NASCUS commends NCUA for consulting and cooperating with state regulators in the development of the proposed corporate credit union rule. NASCUS is committed to working with all parties to develop the best rule possible, and will continue its regulator-to-regulator dialogue with NCUA as well as filing public comments,” said NASCUS President and CEO Mary Martha Fortney.
Capital Requirements
Regarding capital, the proposed rule increases capital requirements and seeks greater consistency with Basel I requirements followed by banks. To be considered adequately capitalized, the proposed rule changes the current 4% minimum total capital ratio with three minimum capital ratios: 1) 4% minimum leverage ratio (5% to be well-capitalized); 2) 4% tier-one risk-based capital ratio (6% to be well-capitalized); and 3) 8% total risk-based capital ratio .
Regarding retained earnings, the corporate must have 100 basis points (bp) of retained earnings after six years and 200 bp after 10 years. Any corporate that fails to make progress toward these requirements (i.e. 45 bp after three years) will have to submit and comply with a retained earnings accumulation plan.
Investment Authority
The proposed rule prohibits investments in collateralized debt obligations and net interest margin securities. It also eliminates Part II expanded authority, thus making “A-” the lowest possible rating for a Nationally Recognized Statistical Rating Organization (NRSRO)-rated investment purchased by a corporate with expanded investment authority. Corporates will have to examine the NRSRO rating from every NRSRO that publicly rates that particular investment and only employ the lowest of the ratings. The proposal also prohibits certain assets entirely and reduces the single obligor limits from 50 percent to 25 percent.
Asset-Liability Management (ALM)
The current corporate rule requires that the corporate perform Net Economic Value (NEV) modeling to measure risk of interest rates changes up to 300 basis points, however it does not currently address matching of asset cash flows to liability cash flows. The proposed rule requires a corporate to keep a sufficient amount of cash equivalents to support its payment system obligations and to demonstrate adequate sources of liquidity, among other ALM provisions.
CUSOs
The proposed rule limits corporate CUSOs to activities approved by NCUA. It retains the existing 704.11 requirements including investment limitations. Brokerage services and investment advisory services will be preapproved in the rule, but NCUA will approve additional categories on an ad hoc basis.
Corporate Governance
New standards would be implemented for the governance of corporate credit unions under this proposed rule. It requires that all corporate credit union board members hold a CEO, CFO or COO title at their member credit union or other member entity. It applies board term limits and states that no board member can serve on more than two corporate boards at one time. Further, the proposed rule requires annual executive compensation disclosure of senior executive officers and directors. Restrictions regarding golden parachutes are included in the proposed rule.
The proposed rule was approved with a 90-day comment period following publication in the Federal Register. NASCUS will file comments and state regulators will continue to dialogue with the agency as the rulemaking continues.
To view the 253-page proposed rule in its entirety, follow this link.
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