[Federal Register Volume 74, Number 22 (Wednesday, February 4, 2009)]
[Proposed Rules]
[Pages 6004-6007]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E9-2292]


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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 [email protected]. 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 [email protected].

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

[[Page 6005]]

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