For some credit unions, finding ways to create alternative capital can be a daunting and ongoing strategic maneuver.
One consideration might be capitalizing through the investment in or the creation of a CUSO, said Henry Wirz, president/CEO of the $1.8 billion SAFE CU in North Highlands, Calif. He offered that solution as the NCUA continues to weigh a proposed amendment to the CUSO rule.
“CUSOs allow credit unions to act locally with the scale and efficiency of a national company,” Wirz said. “But CUSOs also allow credit unions to do something quite unexpected–build capital.”
Besides community development CUs and corporate CUs, Wirz said CUSOs are the only other means he knows of for CUs to create capital other than through retained earnings.
“NCUA strongly supports community development credit unions and corporates and allows them to raise alternative capital. I consider both high risk uses of capital compared to CUSOs,” Wirz said.
SAFE has several CUSO alliances and through those partnerships, Wirz said the capital the CU has invested in these entities builds new capital either through direct returns such as the dividends that are paid on its stock, indirectly through lower operating expenses that increase the bottom line or higher revenues that flow to it.
“If the NCUA added an additional regulatory burden to CUSOs, it may discourage investments in [them], and it will certainly increase costs for CUSOs and reduce our return from the CUSO,” Wirz said. “The unintended consequence will be that NCUA's regulatory burden will limit the growth and success of the one means credit unions have to raise alternative capital and increase efficiency and take advantage of the economies of scale.”
Under the NCUA proposal, the agency would require CUSOs to file financial reports directly with the NCUA and the appropriate state supervisor. The NCUA board also wants to limit aggregate cash outlays to CUSOs from federallyinsured state-chartered credit unions as a way to minimize risk and losses.
Wirz said SAFE cannot raise alternative capital from “outsiders” to build an indirect lending business, but it can capitalize that venture through a CUSO.
“It is unfortunate that NCUA is willing to regulate in ways that can harm capital formation and increased efficiency in credit unions,” Wirz said. “If NCUA did as much to promote CUSOs as they do for community development credit unions or alternatively did as much to regulate community development credit unions, the credit union system would be better.”
Meanwhile, until CUs can sort out their decisions to think of CUSOs as alternative capital vehicles, along with other thoughts about the NCUA’s proposed amendment, one industry consultant is urging a moratorium on all new rules until at least 2013.
“This call for delayed consideration is rooted in my overarching concern that the rule represents yet another interventionist micro-managing assault on credit unions strategic options that added to the regulatory drag on our industry and our nation’s economic recovery,” said Marvin Umholtz in his Aug. 16 comment letter to the NCUA.
Umholtz, president/CEO of Umholtz Strategic Planning & Consulting Services in Olympia, Wash., acknowledged that he does not have any CUSOs as direct clients but does serve CUs that have investments in wholly owned or shared-ownership CUSOs.
Echoing some of the other concerns raised by critics of the NCUA proposal including competition and development threats, Umholtz suggested the agency follow the lead of the Senate Banking, Housing and Urban Affairs Committee, which made recommendations to financial regulatory agencies in May.
Members of the committee suggested that regulators disclose a description of any statutory or other requirements to perform economic analysis and of any internal policies, procedures, and economic guidance “that the agency uses to ensure rigor and consistency in the economic analysis of its proposed rules”, according to Umholtz.