If a journey of 1,000 miles does begin with one step, then NCUA Chairman Debbie Matz's letter to Congress on supplemental capital could be the beginning of a long trip.
Saying she wants to "reverse the disincentive" for credit unions to accept new deposits, Matz asked lawmakers to let credit unions exclude no-risk assets from their definition of total assets and to allow supplemental capital.
In a Jan. 13 letter to the leaders of the Senate Banking Committee and the House Financial Services Committee, Matz cited short-term Treasury securities as an example of the type of no-risk investment that credit unions should be able to exclude from their "total assets" definition.
She told lawmakers that to be eligible, credit unions would have to meet a minimum net worth, as determined by the NCUA, and demonstrate that any declines in their net worth ratio are caused by share growth, not poor management or unsafe and unsound practices.
She wrote that making this change would "moderate the growth of assets due to the inflow of new shares, while still imposing PCA that is appropriate to the circumstances."
In reiterating her call for allowing nonlow-income credit unions to accept supplemental capital, she told lawmakers that doing so would "allow well-managed credit unions to better manage net worth levels under varying economic conditions." She doesn't spell out the specifics of what form the capital should take.
Neither committee has set its agenda for this congress session, but lobbyists for CUNA and NAFCU said they were optimistic that the issue could at least be discussed.
"The stars aren't quite aligned yet," said CUNA Senior Vice President John Magill. "But the chairman's letter is a strong signal that there is support for moving forward. We feel good about our chances."
Before lawmakers act, the Treasury Department will have to weigh in, but it's not clear when or whether that might take place. The department is in transition because former Assistant Treasury Secretary for Financial Institutions Michael Barr has returned to academia and no successor has been named.
"We hope we can get support, they will certainly be an important ally and will give us considerable momentum on the Hill," said NAFCU Director of Legislative Affairs Brad Thaler.
NASCUS President/CEO Mary Martha Fortney said her group plans to stress to lawmakers that they see capital as 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 and that NCUA and state regulators can manage its regulation."
As on many issues, credit unions will face strong opposition from bankers. ABA Senior Economist Keith Leggett telegraphed that group's argument in an entry on his "Credit Union Watch" blog.
On supplemental capital, Leggett wrote that lawmakers should wait for the Government Accountability Office study on how the NCUA has implemented prompt corrective action before giving it additional powers on capital.
He was even more critical of Matz's proposal to change the definition of total assets.
"This accounting gimmick of allowing credit unions to deduct zero risk-weighted assets from total assets would inflate the net worth leverage ratio of credit unions. The leverage ratio does not just address credit risk, but also protects credit unions from other factors that can affect their financial conditions, such as interest-rate exposure, liquidity risks and management's overall ability to monitor and control financial and operating risks," he wrote.
Magill said the bankers' persistent opposition to everything that credit unions want could eventually backfire.
"Bankers can only throw down the negative gauntlet so many times," he said.
But the effort to attain supplemental capital could be harmed by a report from the NCUA and by some divisions between the trade associations.
Last April, a report by an NCUA task force chaired by Board Member Gigi Hyland 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.
The report 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."
CUNA has expressed concern that the NCUA would place too many regulatory constraints on credit unions that want to seek secondary capital, and NAFCU strongly opposes allowing supplemental capital to come from outside the credit union system.