Credit Unions: The Failure of Capital Corporate Federal Credit Union

Highlights

GAO discussed the failure of the Capital Corporate Federal Credit Union (Cap Corp) and the National Credit Union Administration's (NCUA) oversight of Cap Corp. GAO noted that: (1) Cap Corp's failure was due to an inappropriate investment strategy, an inadequate risk management system, insufficient board oversight, lax regulatory supervision and examination, and inadequate capital; (2) Cap Corp improperly recorded the majority of its investment portfolio at its historical cost rather than at market value; (3) NCUA supervision of Cap Corp was ineffective because NCUA tolerated the credit union's internal control weaknesses and poor risk management system, examiners lacked investment expertise, call report data were unreliable, and capital standards were inadequate; (4) Cap Corp's total projected losses of about $70 million will be borne by its member credit unions and any losses above $70 million will be borne by the National Credit Union Share Insurance Fund; (5) Cap Corp's failure raises concerns about credit unions' interest rate risks, especially in collateralized mortgage obligation investments; and (6) the insurance fund could face substantial losses because of credit unions' unrealized losses on their investment portfolios.

Recommendations

Matter for Congressional Consideration

Matter	Status	Comments
Congress should continue to oversee NCUA actions to ensure that an effective regulatory framework for corporate credit unions exists, including adequate capital requirements, and consider legislative action if NCUA fails to implement the needed reforms.	Closed – Not Implemented	NCUA is moving to implement the reforms recommended by GAO. As a result, there is no need for the Congress to take action.

Recommendations for Executive Action

Agency Affected	Recommendation	Status
National Credit Union Administration	To respond effectively to Cap Corp's failure and to enhance the safety and soundness of the industry, NCUA should closely monitor the financial condition and risk-taking of corporate credit unions and large natural person credit unions, especially those that have been substantially affected by declines in the market value of their assets.	Closed – Implemented NCUA has issued a new regulation on Corporate Credit Unions (Part 704) that fully satisfies this recommendation.
National Credit Union Administration	To respond effectively to Cap Corp's failure and to enhance the safety and soundness of the industry, NCUA should ensure that an appropriate risk management framework for corporate credit unions is established that includes appropriate requirements for an internal audit function, a strong supervisory role for boards of directors, consistent standards for calculating market values, and models for stress testing both individual investments and the entire portfolio.	Closed – Implemented NCUA has issued a new regulation on Corporate Credit Unions (Part 704) that fully satisfies this recommendation.
National Credit Union Administration	To respond effectively to Cap Corp's failure and to enhance the safety and soundness of the industry, NCUA should develop and enforce capital standards that adequately account for all risks and that include a minimum leverage ratio.	Closed – Implemented NCUA has issued a new regulation on Corporate Credit Unions (Part 704) that fully satisfies this recommendation.
National Credit Union Administration	To respond effectively to Cap Corp's failure and to enhance the safety and soundness of the industry, NCUA should ensure that generally accepted accounting principles accounting standards are followed for classifying investments as held to maturity or available for sale, so that investments are recorded at market value when required.	Closed – Implemented According to NCUA, corporates are now required to value and report the value of assets according to standard accounting practice.
National Credit Union Administration	To respond effectively to Cap Corp's failure and to enhance the safety and soundness of the industry, NCUA should increase the expertise of staff overseeing corporate credit unions, especially emphasizing training in investment analysis.	Closed – Implemented The number of full-time corporate examiners has increased from 14 in 1994 to 21 in October 1996. During 1996, NCUA provided for 3 weeks of formal investment training for all corporate examiners, and also subscribed to investment periodicals for each examiner. Additionally, a senior investment officer now assists in on-site examination of problem corporates. Most corporate examiners who were inexperienced in the field of investment management now have the benefit of about 2 years work that is concentrated in investment issues.
National Credit Union Administration	To respond effectively to Cap Corp's failure and to enhance the safety and soundness of the industry, NCUA should assess the accuracy and completeness of call report data and take steps to ensure that data are accurate and useful for off-site supervision.	Closed – Implemented NCUA officials told GAO that the required monthly reporting form (5310) has been revised and new processes are in place to verify, analyze, and use for off-site supervision the data submitted by corporates to NCUA.
National Credit Union Administration	To respond effectively to Cap Corp's failure and to enhance the safety and soundness of the industry, NCUA should establish a tripwire system which would require prompt corrective action before a failing credit union's capital is exhausted.	Closed – Implemented On May 3, 1999, NCUA issued for comment a proposed rule that would establish rules that require prompt corrective action by NCUA for credit unions with inadequate capital. This action was required under the field of membership legislation passed by the Congress last year, and, by statute, the final rule must be effective not later than February 7, 2000.
National Credit Union Administration	To respond effectively to Cap Corp's failure and to enhance the safety and soundness of the industry, NCUA should delay implementing any policy that would allow corporates to compete with each other for membership until necessary regulatory reforms, including adequate capital standards, are established and in force.	Closed – Implemented NCUA has issued a new regulation on Corporate Credit Unions (Part 704) that fully satisfies this recommendation.

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Financial Markets and Institutions

Bank failuresFederal credit unionsFinancial institutionsFinancial managementInterest ratesInvestmentsLossesRegulatory agenciesRisk managementCredit unions