Time to Gear Up Efforts for Capital Reform
NCUA Chairman Debbie Matz reaffirmed her support for supplemental capital for credit unions at WOCCU’s annual meeting. Credit unions’ need for capital reform can only heighten. But permitting the NCUA to define prompt corrective action buckets requires action by Congress.
Once Washington moves past the debt ceiling mess, credit unions need effective lobbying action on the issue of capital reform. The NCUA now has two Capitol Hill professionals, Democrats Todd Harper and former Texas league lobbyist Republican Buddy Gill. The issue is a real safety and soundness concern for the NCUA, so while the agency technically doesn’t “lobby” Congress, it can provide guidance on matters such as capital reform.
The national trade associations will also need to up their lobbying game. Credit unions haven’t won anything proactive for the industry in more than a decade. Ironically that win was what also threw PCA (and the business lending cap!) around credit unions’ necks like a dead albatross. PCA for credit unions was intended to provide credit unions parallel capital protection to the banks as imposed in the FDIC Improvement Act. However, one huge problem for the NCUA and credit unions was that Congress decided to define PCA requirements for credit unions rather than allowing the NCUA to do it even through the FDIC has that flexibility.
CUNA President/CEO Bill Cheney has been promoting his 535-seat strategy and holding state leagues more accountable for lobbying efforts. It can happen that a league’s board and, presumably members, aren’t that interested in lobbying or maybe they just aren’t interested in or supportive of a particular issue. The CEO serves its board. The league exists to serve its members–members the state association is arguably closer to. Individual state league’s interests are not necessarily in line with what CUNA is doing, which could prove to be a sticking point in the theory.
Credit union lobbying in Washington has survived for a while playing defense against issues like cram-downs and creating a minimum threshold for CFPB coverage but lost their latest defense against the debit interchange cap.
The Government Accountability Office studied PCA’s effects on credit unions in 2004, but only looked at times of relative economic strength (2000-2003), University of Maryland Professor Clifford Rossi noted. His study, “Implications of Prompt Corrective Action for the U.S. Credit Union Industry,” which he said was not requested by anyone, demonstrated what he termed as the PCA trap.
Now that the economy has fallen and dragged on as it has the last few years, he ran simulations that clearly showed the harmful effects credit union PCA as it stands in an economic downturn that he termed the PCA trap. The sample $100 million credit union growing at 5% (average between 1997 and 2007) grew net worth in dollars and as a percent during a stable economic environment. During an aggressive growth year, assets outpaced net worth and dropped the credit union’s capital ratio. In a stressful economic environment, this credit union’s net worth ratio takes a nose dive. The same credit union in that same poor environment but with supplemental capital experienced a drop off but nowhere near the degree of the credit union without supplemental capital.
Rossi concluded that the results without capital reform tied credit union executives’ hands, causing them to tighten or increase the cost of credit at exactly the time their members and potential members needed them most.
What will be the next truly galvanizing issue for credit unions? One CEO suggested to me that credit unions needed an enemy other than their own members in these battles–a hideous beast to demonize as they did with banks in H.R. 1151. Capital reform could be that issue. Without it, whether limited supplemental or risk-based, otherwise healthy credit unions could find themselves in hot water. Then if supplemental capital is granted for credit union members only, interest levels would have to be high enough to make it worthwhile. Paying a high enough return for the risk involved also comes into question.
Consolidation is another answer for credit unions in PCA trouble. Or these credit unions could jump charters to one with greater capital flexibility, not only to manage regulatory issues but to just plain grow and survive. You might recall an Aite group study from 2008 that found 33% of credit unions surveyed (all over $100 million in assets) planned to convert to bank charters. Obviously that has not come to fruition at this point but it doesn’t mean they don’t have a plan. Is mass charter conversion the impetus for capital reform? The necessary demon?