Letter to Corporate Credit Unions No.: 2011-02 Large Consolidation Issues February 2011

Prepared by the NASCUS Regulatory Affairs Department - February 2011

NCUA’s Office of Corporate Credit Unions (OCCU) has issued LTCCU No.: 2011-02, Large Consolidation Issues, to address issues raised by the credit union system’s development of business plans to recapitalize corporate credit unions and/or partial replace the services previously provided by corporate credit unions.  OCCU’s letter identifies two general theories under which business plans are being developed:

  • Consolidation among corporate credit unions
  • Creation of credit union service organizations (CUSOs) to provide specific services to credit unions without the full array of services normally offered by a corporate credit union

In OCCU’s view, either approach could raise concerns that the concentration of services or the aggregation of service volumes in one entity large enough to introduce systemic risk may create an unacceptable “too big to fail” scenario.  An operational issue that causes a service interruption to large numbers of credit unions could pose a major risk to those credit unions and their members, and potentially introduce reputation risk to the entire credit union system.  In the event a corporate credit union or CUSO were to fail, OCCU questions whether there would be adequate contingency plans to ensure uninterrupted service to a large number of credit unions and an orderly transition to alternate service providers.  The guidance also cautions that a large number of credit unions seeking new service providers in a very short time period could overwhelm the capabilities of alternate service providers: resulting in service disruptions.

The guidance instructs credit unions to plan for these contingencies.

The guidance also notes that the corporate business plans must address long-term future viability. Going forward, an entity that will primarily be a service provider must be able to demonstrate the ability to safely generate adequate income not only to maintain existing services and operating systems, but also to adequately fund for identifying risks and ensuring operational security and stability in the future.  

The guidance states that the corporate business plans must consider the various operational facets that must come together for a viable long term entity.  Corporate credit unions and their members should:

  • Evaluate the potential risks with the model they propose
  • Determine if the risk is within their tolerance for risk
  • Establish policies, procedures, and actions that will be taken to mitigate the risk
  • Have contingency plans for service interruption