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E-Mail: eclark@docfcu.org

Phone: 202-482-1082

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P.O. Box 14720

Washington, DC  20044-4720

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Thursday
Feb182010

Other Comments on proposed corporate regulations 

Start with the entry before this one.  The comments about credit are in that letter and are my biggest concern about the proposed regs.  eec

 

 

Mary Rupp, Secretary of the Board

National Credit Union Administration
1775 Duke Street
Alexandria, Virginia 22314-3428

 

Dear Ms. Rupp, 

I applaud the NCUA for their leadership in the solution of the corporate credit union issues.  I have completely read through the proposed corporate regulations and although I believe they have merit I see several areas for concern.  The most important area of concern regards credit evaluation of the collateral underlying investments the corporate credit unions may consider for purchase.  My concerns in this area are so great that I have forwarded a separate letter to you regarding this topic.  I cannot overemphasize my concerns about the inappropriateness of NCUA’s approach to credit evaluation in the proposed corporate regulations.  That said here are the other areas of concern I have. 

Too much emphasis on NEV for ALM monitoring without guidelines for how NEV assumptions will be reviewed.  NEV is a very easily manipulated ALM monitoring tool.  If NEV is to be used as a measure of interest rate risk then guidelines for evaluation of the underlying NEV assumptions should be outlined.  Again, NEV is a very easily manipulated. 

No guidelines for testing Net Interest Income (NII).  NII is a much more effective tool for measuring interest rate risk than NEV.  And yet scant mention is made of NII and again there are no guidelines for its proper measurement. 

What exactly is an instantaneous spread widening?   A clear definition, (if that's possible) needs to be put into the regulations of what instantaneous spread widening is. 

The average life of two years limitation on investments will effectively prevent corporates from buying mortgage backed securities because the average lives of these securities are affected primarily by interest rate changes.  If interest rates rise the average lives of the investments they buy will extend.  Will they then be forced to sell the bonds at a potential loss in an adverse market environment?  (Can you say CapCorp?)  Instead of MBS’s they will be forced to buy asset backed securities.  If  the credit of the underlying collateral has been properly reviewed MBS’s would be safer assets from a credit basis than asset backed securities because it is credit issues that typically affect the average lives of asset backed securities. 

 Related to the average life of two years issue, there is no differentiation between variable rate and fixed rate MBS's.  Even though the average life of a variable rate MBS will extend when interest rates rise, the return on the bond also increases thereby improving the holding entity’s bottom line and helping to maintain the NII position of the corporate. 

 With expanded authority the corporates would be able to invest in all sorts of foreign assets.  Why does a corporate need to do this?  Is there anyone on staff at a corporate that has the expertise to evaluate such investments?  I would delete this part of the proposed regulations. 

No one from staff of a trade association should serve on the Board of a corporate.  This should be included in the proposed regulations.

 On page 59 of the commentary of the proposed regulations there is discussion of long term investments that can be rated one grade below investment grade.  First of all, the ratings of the rating agencies should not be used to adjudicate appropriate investments for corporate credit unions and secondly, no investment, even if it is a traded position, should be one grade below investment grade. 

The approximate average life mismatch of .25 years described in pages 87 and 88 of the proposed regulation commentary is too restrictive for a corporate to make sufficient margin to cover operations. 

On page 100 of the proposed corporate regulation commentary there is a chart that shows corporate credit unions’ liabilities with a spread to LIBOR of zero.  This is a totally unrealistic assumption.  No credit union will invest at their corporate at LIBOR flat.  This fallacious assumption brings into question NCUA’s assumption that corporates can operate profitably under the restrictions in the proposed corporate regulations.  And by inference it brings into question the corporate credit unions’ ability to raise the amounts of retained earnings required by the new corporate regulations. 

These are my thoughts on the major areas of concern I saw.  I hope that many people take the time to read the corporate regs and draw their own conclusions.  The collapse of the corporates will affect the bottom line of every credit union for years to come.  Just on this basis it is essential to the credit union industry that the corporate credit unions be regulated by regulations that prevent this from happening in the future.  I do not believe the proposed regulations meet that standard. 

Sincerely,

 

Evan Clark

CEO

Department of Commerce Federal Credit Union

202-482-1082

eclark@docfcu.org

 

Thursday
Feb182010

Comments on proposed corporate regulations regarding credit

Mary Rupp, Secretary of the Board

National Credit Union Administration
1775 Duke Street
Alexandria, Virginia 22314-3428

 

Dear Ms. Rupp,

I am writing in response to the NCUA’s proposed corporate credit union rules.  I applaud NCUA’s leadership on the issue of the corporates and believe that the proposed rules are a good step forward in proper governance of the corporates.  However I believe that the NCUA has completely missed the mark with the analysis of the problems currently facing the corporate credit unions and the credit union movement.  The fundamental issue at the core of the current corporate issues was a failure on the part of the corporates to properly evaluate the credit quality of the collateral underlying the investments being considered for purchase.  In many instances the evaluation should have been done on a very granular level, to the point of reviewing the underlying collateral documentation on a loan by loan basis.  If done properly it would have revealed the lack of documentation for many of the loans underlying the investments purchased and the credit risk that was being contemplated for purchase.  I have read the proposed new rules in their entirety and I believe the one area where there should be stronger language is in the area of credit review prior to purchase of investments and subsequent review of credit after purchase. 

With regards to evaluation of credit prior to purchase of investments Section 704.5 (a) (1) if expanded should serve as the corporates' guide to proper evaluation of an investment prior to purchase.  This section reads: 

(1) Appropriate tests and criteria for evaluating investments and investment transactions before purchase; and

I believe this section needs to be expanded to include recommended tests and criteria.  These recommended tests and criteria should include review of the credit quality of the underlying collateral of the investment being considered for purchase.  A review of credit quality might include such things as current and historical delinquency and default rates of underlying collateral, loan to value ratios at time of issuance of the security and at time of purchase, and the percentage of loans in the investment being considered for investment that have limited or no documentation.  As stated earlier, consideration should also be given to evaluating the credit of the underlying collateral on a loan by loan basis.  If the corporates do this type of comprehensive review of credit prior to purchase and then clearly weigh the credit risks and interest rate risk against the proposed return on the investment the chances of a problem similar to the current situation will be greatly mitigated.

Further, I don't believe NCUA, the corporate credit unions or the credit union movement should put the heavy reliance on the Nationally Recognized Statistical Rating Organizations, (NRSRO), that the proposed rules suggest.  Although I do not know I have to wonder if over reliance on the NRSRO's didn't contribute heavily to the problems the corporates and the credit union movement now face.  It appears as though this reliance on the NRSRO's took the place of proper evaluation of credit by the corporates and frankly, proper oversight by the NCUA.  Furthermore, the independence of the NRSRO’s must be questioned based on how they are compensated for their services.  I believe that all references to the NRSRO's should be removed from the proposed rules because the best interests of the corporate credit unions and the credit union movement are not served by reliance on the judgment of the NRSRO’s.  I believe that section 706 (g) should be the centerpiece of the new rules evaluation of credit after purchase. This section currently reads:

(g)

Reporting and documentation. (1) At least annually, a written evaluation of each credit limit with each obligor or transaction counterparty must be prepared and formally approved by the board or an appropriate committee. At least monthly, the board or an appropriate committee must receive an investment watch list of existing and/or potential credit problems and summary credit exposure reports, which demonstrate compliance with the corporate credit union‘s risk management policies.  

This analysis, if done properly, will protect the corporates and the credit union movement from a repeat of current problems we are in.  In most instances the credit union should employ a qualified, independent third party to evaluate the credit worthiness of its securities.

There are other issues that I have with the proposed rules that I will address in a separate letter.  However, the seriousness of the credit issues is such that I wanted to address it in separate correspondence.  Thanks again for NCUA’s leadership in the area of corporate credit union reform and thank you for taking the time to read about my concerns regarding the proposed corporate rules. 

Sincerely,

 

Evan Clark

CEO

Department of Commerce Federal Credit Union

202-482-1082

eclark@docfcu.org

Wednesday
Feb032010

Acadiana - Reminds Me of Mother's in New Orleans

Friday
Jan082010

The Problems with the new Corporate Regs, (a synopsis)

Hi Everyone,

I applaud the NCUA for their leadership in the solution of the corporate credit union issues.  I have completely read through the proposed corporate regulations and although I believe they have merit I see several areas for concern.  I think the biggest problem is that NCUA has completely missed the mark on what actually caused the issues at the corporates, most notably US Central and Wescorp.  The problem was a CREDIT issue.  If proper evaluation of the collateral underlying the bonds that were purchased would have been done we probably wouldn't be facing the problem we are.  And yet the proposed regs give little mention to credit or the proper evaluation of credit pre-purchase or after purchase of investments.  Instead there is a reliance on the credit rating agencies.  Relying on the rating agencies to adjudicate the appropriateness of an investment is not proper evaluation and it should not be relied upon by either the corporates or the NCUA.  And yet throughout the regs NCUA mentions the rating agencies as the benchmark for judging investments.  This should not be done and all reference to the rating agencies should be removed from the regs.  A regimen of proper credit evaluation should be developed and put in place of the wrongly placed reliance on the credit rating agencies.

 Other areas I have concerns about include the following:

1. Too much emphasis on NEV for ALM monitoring without guidelines for how NEV assumptions will be reviewed.  NEV is a very easily manipulated ALM monitoring tool.  If NEV is to be used as a measure of interest rate risk then guidelines for evaluation of the underlying NEV assumptions should be outlined.  Again, NEV is a very easily manipulated.

2. No guidelines for testing Net Interest Income (NII).  NII is a much more effective tool for measuring interest rate risk than NEV.  And yet scant mention is made of NII and again there are no guidelines.

3. What exactly is an instantaneous spread widening?   A clear definition, (if that's possible) needs to be put into the regulations of what exactly this is.

4. The average life of two years limitation will effectively prevent corporates from buying mortgage backed securities because the average lives of these securities are affected primarily by interest rate changes.  If interest rates rise the average lives of the investments they buy will extend.  Will they then be forced to sell the bonds at a potential loss in an adverse market environment.  (Can you say CapCorp?)  Instead of MBS’s they will be forced to buy asset backed securities.  With MBS's if the credit of the underlying collateral has been properly reviewed they would be safer assets from a credit basis than asset backed securities because it is credit issues that typically affect the average lives of asset backed securities.

5. Related to the average life of two years issue, there is no differentiation between variable rate and fixed rate MBS's.  Even though the average life of a variable rate MBS will extend when interest rates rise the return on the bond also increases thereby improving the holding entities bottom line and helping to maintain the NII position of the corporate.

6. With expanded authority the corporates would be able to invest in all sorts of foreign assets.  Why does a corporate need to do this?  Is there anyone on staff at a corporate that has the expertise to evaluate such investments?  Would you want your corporate invested in such assets?

These are my thoughts on areas of concern I saw.  I hope that many people take the time to read the corporate regs and draw their own conclusions.  The collapse of the corporates will cost the credit union movement $16 billion, (trust me on this one, the real number will be at least that big).  And it will affect the bottom line of every credit union for years to come.  Just on this basis I think it's important that this time NCUA gets it right.

Tuesday
Jan052010

Why Would We want the Corporates to invest in this?

PART  II

 

(a)  A corporate credit union that has met the requirements of Part I of this Appendix and the additional requirements established by NCUA for Part II may invest in:

 

(1)  Debt obligations of a foreign country;

 

(2)  Deposits and debt obligations of foreign banks or obligations guaranteed by these banks;

 

(3)  Marketable debt obligations of foreign corporations. This authority does not apply to debt obligations that are convertible into the stock of the corporation; and

 

(4)  Foreign issued asset-backed securities.

 

(b)  All foreign investments are subject to the following requirements:

 

(1)  Investments must be rated no lower than the minimum permissible domestic rating under the corporate credit union’s Part I or Part II authority;


(2)  A sovereign issuer, and/or the country in which an obligor is organized, must have a long-term foreign currency (non-local currency) debt rating no lower than AA– (or equivalent);

 

(3)  For each approved foreign bank line, the corporate credit union must identify the specific banking centers and branches to which it will lend funds;

 

(4)  Obligations of any single foreign obligor may not exceed 50 percent of capital; and

 

(5)  Obligations in any single foreign country may not exceed 250 percent of capital.