CUs Deserve a Complete Capital Restructuring
NCUA Chairman Debbie Matz renewed her call for supplemental capital for credit unions in a letter to the Senate Banking and House Financial Services Committees. The credit union trades heralded the letter while the ABA's Keith Leggett took a swipe at it in his blog, "Credit Union Watch."
Matz proposed allowing credit unions meeting certain NCUA-established criteria to exclude zero-risk assets, such as Treasury securities from the definition of total assets. The NCUA would set a minimum net worth requirement and determine whether share growth is the cause of declining net-worth, and not poor management or unsafe practices, before a credit union would be allowed to exercise this exclusion.
She also suggested authorizing qualifying credit unions to issue supplemental capital. This supplemental capital would be subject to strict regulatory prescriptions that address safety and soundness criteria, protect investors and preserve the cooperative credit union governance model.
Supplemental capital can be a touchy subject among credit union volunteers and executives. Terms would have to be rock solid and long term to keep supplemental capital investors from trying to exert influence. They must not be able to simply pick up their ball and go home if they don't like the way things are going.
In exchange for that, the premium paid out to investors must be high but not so high that it's not worth it to the credit union.
In keeping with the credit union philosophy and structure of member ownership, supplemental capital offerings should be made to members only.
One thing all parties should realize is that supplemental capital should not go toward saving a sinking credit union. Only credit unions that are otherwise healthy but have experienced an extraordinary influx of deposits should be able to lay claim to supplemental capital. No sense in throwing good money after bad.
Redefining net worth to exclude risk-free assets makes complete sense, as SECU President/CEO Jim Blaine demonstrated just a couple weeks ago (CU Times, Jan. 12, 2011, page 1) but doesn't go far enough. This is just a smidgeon of the risk-based capital reform that would benefit all credit unions and regulators with a better understanding of the health of an institution.
This bare minimum stance also doesn't leave room for negotiation. There is a fine line between what you can credibly ask for and going over the top but eliminating zero-risk assets from net worth comes nowhere near that. A complete risk-based capital restructuring for credit unions is what is needed. Given their track record for helping members through the furloughs and economic malaise, they deserve no less.
In years past, Keith Leggett did not disapprove of credit unions getting risk-based capital so much as the leverage ratio used. Yet the ABA has fiercely and successfully opposed supplemental capital. It doesn't make sense to put all credit unions' eggs into the supplemental capital basket.
But it's early in the legislative season and many more initiatives are likely to come up, from net worth to member business lending. These cannot be half-loafed despite bankers' objections.
However, credit unions will have to accomplish business lending reforms without former Congressman Paul Kanjorski and, if not in the next two years, without Senator Joseph Lieberman, who announced he would not seek re-election in 2012. Lieberman had backed CURIA in the Senate, which included a provision on business lending. Senator Mark Udall still stands to pick up the business lending fight in the Senate if he chooses to again.
In the House, credit union business lending supporter Republican Ed Royce may be inclined to take up the legislation again. But what will it mean for him after he unsuccessfully challenged Spencer Bachus for the House Financial Services Committee chairmanship? Bachus was one of only a handful of representatives to vote against HR 1151 but quickly came around to credit unions and has been relatively supportive ever since.
Credit unions are at a tremendous advantage right now with the public. In order to get what they want, credit unions must effectively use that to their advantage within the halls of Congress.