CU Supplemental Capital Is a Decade Overdue
NASCUS and state regulators remain steadfastly supportive of supplemental capital for credit unions. We have believed for years that supplemental capital is appropriate for credit unions, a necessary tool for safety and soundness and critical to the credit union system's long-term health and sustainability.
As evidenced by the development of the third iteration of Basel standards, international regulators are capital planning far into the future and addressing prospective capital considerations for banks and other financial institutions. What are U.S. credit unions doing as far as capital planning for the future? Unfortunately, relying on just retained earnings for net worth does not provide needed flexibility for capital planning. How much longer can credit unions thrive and compete under these archaic capital standards?
Natural person credit unions that are not designated low-income remain virtually the only class of depository institutions denied access to supplemental capital. This distinction carries enormous implications for natural person credit unions' ability to manage both the current economic climate but also the eventual economic recovery. At a more fundamental level, it is ironic that the credit union system, with its emphasis on member participation in governance, remains a system where its very members are denied the basic ability to express their commitment to their credit union by recapitalizing it. Further, from a regulatory standpoint, a well managed supplemental capital program can provide increased systemic stability, additional balance sheet management tools and an extra buffer to mutualized losses.
Our nation's credit unions must get access to supplemental capital; it can no longer be just a theory or a policy consideration. We need to achieve the legislative and regulatory changes necessary as soon as possible. NASCUS has been urging the credit union system for years to make comprehensive capital reform a priority. We welcome CUNA and NAFCU's support for supplemental capital. NASCUS also commends NCUA Board Member Gigi Hyland for undertaking a study of this issue as well as NCUA Chairman Debbie Matz's and NCUA Board Member Mike Fryzel's public support for supplemental capital. What is needed now is for the entire movement to make capital reform a priority to be achieved, not a luxury to be accepted.
An amendment to the Federal Credit Union Act is necessary to allow credit unions to utilize supplemental capital. Then, state and federal regulators would need to establish regulatory standards for supplemental capital. However, state and federal regulators would not be starting from scratch-there are supplemental capital models in use around the world, and NCUA and state regulators continue to study the regulatory considerations for its use here in the U.S.
Generally speaking, there are three forms of supplemental capital that could easily translate to the credit union model: voluntary patronage capital, mandatory patronage capital and subordinated debt. The parameters of each of these forms of capital can be worked out through the rule-making process. What is important is that the statutory change provides a flexible framework for the credit union system to adopt and evolve a modern capital structure.
Supplemental capital can be structured in a way that preserves the tax exemption and mutuality of credit unions. It is already in use by low-income and corporate credit unions in this country. Internationally, it is in use by most developed credit union systems. In short, credit unions can utilize supplemental capital without compromising the characteristics that many associate with the movement. To implement supplemental capital for wider use within the system, NASCUS and state regulators would work with NCUA to develop regulations to ensure the expanded capital opportunity is accompanied by comprehensive and meaningful disclosures, investor suitability parameters, clear expectations for management due diligence and stringent credit union suitability standards.
NASCUS was one of few voices of support on supplemental capital for over a decade. For NASCUS and state regulators (many of whom are familiar with supplemental capital through bank regulatory responsibilities) achieving capital reform has long been a matter of safety and soundness.
Increased capital and investor discipline can provide critical buffers during economic downturns. We believe credit unions can manage the complexities of supplemental capital. We know that state regulators can manage its regulation. The time for supplemental capital was right a decade ago when NASCUS began to push for capital reform. The time now is critical. Fortunately, in the last year, momentum has been building for supplemental capital, and many are realizing that credit unions absolutely cannot rely on retained earnings forever.
Mary Martha Fortney is the president/CEO of NASCUS. She can be reached at 703-528-8688 or firstname.lastname@example.org