Allowing credit unions to raise supplemental capital that is counted toward net worth requirements is an "appropriate policy consideration," as long as there are strong regulatory safeguards are in place, according to a report issued today by the NCUA's Working Group on Supplemental Capital chaired by Board Member Gigi Hyland.
The report said any capital must adhere to three principles: preservation of the cooperative credit union model, robust investor safeguards and increased prudential safety and soundness safeguards.
Any policy change to allow such capital would have to be approved by Congress because, the report concludes, the "NCUA cannot count other sources of capital as 'net worth,' by regulation.' When Congress passed HR 1151, it mandated that net worth could only come from retained earnings."
The NCUA plans no discussion or action "at this time," on the report, NCUA Chairman Debbie Matz said.
Through a spokesman, Matz added that if "Congress gives NCUA supplemental capital authority, we will of course act."
In a letter that Matz wrote to House Financial Services Committee Chairman Barney Frank in December, she encouraged Congress to "consider authorizing qualified credit unions, as determined by the NCUA Board to issue alternative forms of capital." Matz did not say what form the alternative capital should take. The Treasury Department hasn't taken a position on the subject.
Through a spokesman, NCUA Board Member Michael Fryzel declined comment.
Several lawmakers who follow credit union issues declined comment on the report and lobbyists for CUNA and NAFCU said they expect any legislative action would likely come later, rather than sooner.
Hyland said she hopes if Congress takes up the subject, it won't tie the agency's hands too much.
"I am fearful Congress would put too much in the statute," she said in an interview.
Hyland's report, which was the result of more than a year of research, spells out the three acceptable types of capital: voluntary capital invested by a credit union member; conversion of the par value share required for credit union membership to a form of supplemental capital; credit unions issued subordinated debt, subject to standard market practices, with the understanding that it does not come with voting rights or any other involvement in the management of the credit union.
But the report contained several warnings and noted that the agency's supervisory experience with the 41 low-income credit unions (out of 1,102) that receive secondary capital has been "mixed." It criticized some of those credit unions for poor due diligence and "premature and excessively ambitious concentrations of uninsured secondary capital to support unproven or poorly performing programs."
The report also noted that the substantial losses at U.S. Central Federal Credit Union and Western Corporate Federal Credit Union caused the exhaustion of paid-in and membership capital. While the capital served its function-to absorb losses-it is symptomatic of problems with that kind of capital.
"The industry demonstrated a strong unwillingness to use capital as a reserve of funds to manage the risk of the institutions and absorb losses. These experiences substantiate the lack of understanding among credit unions about the function of capital and are troubling when contemplating the authorization of a form of leverage (supplemental capital) that may have less discipline than retained earnings," the report said.
While the top regulatory specialists of CUNA and NAFCU praised the report for endorsing supplemental capital, both took issue with aspects of it.
CUNA Senior Vice President and Deputy General Counsel Mary Mitchell Dunn expressed concern that the agency wants to put too many regulatory constraints on credit unions that want to raise secondary capital.
"You want to have rules that are strong enough that you can regulate for safety and soundness but not weigh it down with so many requirements that it serves as a deterrence to credit unions to participate," she said. "The key is enough flexibility to make it work."
NAFCU Senior Counsel and Director of Regulatory Affairs Carrie Hunt said her association is concerned about the possibility of allowing for capital from outside the credit union system. This could cause undue influence by those that don't have the interests from the credit union in mind, she noted.
"We want to make sure that the executives and the board aren't subconsciously making decisions with those [outside institutional] investors in mind," Hunt said.
NASCUS President/CEO Mary Martha Fortney said she is pleased with the report but is frustrated that it may take a while for legislative action to occur.
She said the timetable is "very hard to predict," in part because nobody on Capitol Hill "has stepped forward to walk this the whole way."
Fortney noted that several states-including California and North Carolina-allow state-chartered credit unions to seek secondary capital, but it isn't counted toward net worth.
State Employees Credit Union President/CEO Jim Blaine said he hopes the report and Matz's endorsement of secondary capital will help push the process along for the sake of the health of credit unions.
"The more capital we have, the better off we are," he said. "If we don't have the option to seek more capital we are driving a boat without any life rafts."