Fortunately in 2009, NASCUS has been joined by many others to advocate for supplemental capital for credit unions. Notably, NCUA Chairman Debbie Matz wrote to House Financial Services Committee Chairman Barney Frank (D-Mass.) encouraging him to reform capital for credit unions, including access to supplemental capital for qualifying credit unions. State and federal regulators' agreement on supplemental capital is critical as we push for the necessary legislative changes and develop regulatory guidelines.
Supplemental capital has regulatory practicality and safety and soundness benefits. State regulators believe supplemental capital for credit unions makes sense, especially as economic conditions continue to impact credit union balance sheets and member service.
As Chairman Matz stated in her Dec. 7 letter to Chairman Frank, healthy, safe and sound credit unions are constrained in their ability to accept new deposits because of the effect on net worth for Prompt Corrective Action. Credit unions know that they cannot raise capital that would increase their net worth quickly, and fear the PCA consequences of becoming less than well capitalized.
The restrictive method of raising capital only through retained earnings does not allow for the rapid response to changing circumstances, even in the case when those changes are normally a net positive, a flow of member confidence and deposits into the institution. Providing well-managed credit unions with the opportunity to raise capital through other means than retained earnings allows them to meet their members' expectations for service even as more of those members seek to deposit funds in their credit union. Supplemental capital is the solution to this problem for some credit unions. Other financial institutions have utilized these instruments for years in a similar manner.
Supplemental capital has regulatory benefits as well. Regulators could approve issuance of supplemental capital to promote growth management and to facilitate more efficient use of funds. Supplemental capital could also provide for additional risk mitigation, assist in regulatory mergers and provide an extra layer of support for the share insurance fund.
The credit union system understands that a statutory change to the definition of net worth is necessary for supplemental capital to become a reality. Current laws governing capital for credit unions rely on federal statutory leverage ratios, therefore excluding potential sources of reliable capital. These potential sources, if realized, could strengthen credit unions and allow them to better meet the credit needs of members and support overall economic growth and stability.
NASCUS and others in the credit union system continue to discuss supplemental capital with members of Congress. We believe that as regulatory reform efforts move closer to conclusion, we can focus legislators' attention to this critical change for credit unions. Leaders of the House Financial Services and Senate Banking Committees are aware that supplemental capital is a priority.
Legislative or regulatory changes may also be necessary on the state level, so that supplemental capital can be offered by state-chartered credit unions. We encourage state-chartered credit unions to start a dialogue with their state regulators on possible changes so they can be ready to utilize this capital reform as soon as it is available. The NCUA will also review its regulations for federal credit unions.
Supplemental capital can be structured in a way that preserves the federal tax exemption and mutuality of credit unions. Credit unions have historically evolved with the financial services system while retaining their fundamental cooperative structure. Further, existing models used by community development credit unions and by credit unions in other nations have not posed a risk to the tax exemption or cooperative nature. NASCUS has a long-standing working group that has studied supplemental capital for credit unions; there are supplemental capital models that are appropriate for natural person credit unions.
Once the statutory changes are made to the federal definition of net worth, state and federal regulators will develop the appropriate regulatory parameters. There will be strict regulatory approval and scrutiny before credit unions are allowed to raise supplemental capital. The instruments must have a proper structure in terms of maturity and must meet safety and soundness considerations. Further, state and federal regulations will dictate the proper disclosures and marketing practices for supplemental capital. The credit union regulatory system has always upheld robust safeguards for the members.
We recognize that some credit unions are not in an economic position to attain or benefit from supplemental capital at this time. Supplemental capital is not an option for every credit union, but it should be available to those that can use it.
We need to make these changes now so that healthy credit unions can utilize the appropriate range of tools to maintain regulatory capital, better react to economic conditions, serve their members and prepare for the future. We will continue to work with NCUA and others to realize success on supplemental capital in the near future.
Mary Martha Fortney is president/CEO of NASCUS. She can be reached at 703-528-8351 or firstname.lastname@example.org