Supplemental Capital’s Benefits Outweigh Arguments Against
For many years, NASCUS was one of few voices supporting supplemental capital. Today, we've been joined by many in the credit union system who are eager for other means of raising capital in addition to retained earnings.
Credit union access to other forms of capital is an essential part of credit unions' long term viability. NASCUS also sees capital reform as a safety and soundness issue. However, there are some in the system who are still unconvinced that supplemental capital is a good idea or argue that it contradicts the credit union mission from a philosophical perspective. These and other concerns are overstated and can be addressed.
Recently, NASCUS and some state regulators participated in the International Credit Union Regulators Roundtable where attendees addressed capital for credit unions. We asked the international regulators whether their credit unions would be better off with or without supplemental capital. They unanimously agreed that the credit unions are better positioned with supplemental capital. Further, as discussion among international credit union regulators focused on conforming to BASEL III, it was clear that the U.S. credit union capital structure was far behind our international counterparts and must be reformed soon to keep up with the expectation that capital standards will continue to evolve.
Credit unions have few options for long-term capital planning except for further tightening of balance sheets and slimming of dividends. Even with smaller dividends, deposits continue to flow into credit unions. There is anecdotal evidence that some credit unions are turning away deposits. This deepens the problem of an increasing denominator (assets) and an often stagnant numerator (retained earnings) in the calculation of net worth. Citing the disincentive to accepting deposits and its impact on net worth, NCUA Chairman Debbie Matz has expressed her support for supplemental capital.
Some argue that supplemental capital would weaken credit union mutuality. Supplemental capital can be structured in a way that preserves mutuality and protects investors. After all, low-income credit unions, corporates and the international credit union system use supplemental capital. Are those credit unions any less cooperative than U.S natural person credit unions? We think not. Further, the current capital structure limits the ability of members to reinvest in their credit unions, and in some cases to access their credit unions during times of increased savings.
Another argument we often hear is that given the current net worth levels, there is no need for supplemental capital. Despite the average net worth, there are unrelenting downward pressures on net worth and credit unions are continuing to operate on very little or negative earnings. Is there a foreseeable way for credit unions to continue to maintain their safety and soundness if this pattern remains?
Supplemental capital is not a panacea, and it's not for every credit union. But we steadfastly support a credit union's choice to use supplmental capital, and regulators' discretion to supervise it. We believe that as a system, our credit unions are as capable of managing complex transactions (such as member business lending or supplemental capital) as any other depository institution. We reject the notion that the credit union system is less sophisticated or less able than all other depository intuitions.
Discussions about supplemental capital must include, of course, Congress. As you know, a legislative change is necessary to the net worth definition to achieve this reform. There are differences of opinion as to how the legislative change should be approached. Some think the statute should fully include the parameters for credit union access to supplemental capital. Others believe that a broad change should be adopted and then state and federal regulators would develop the regulatory parameters necessary for safe and sound use of supplemental capital. Following a simple change to the net worth definition, NASCUS believes that state and federal regulators can competently build a regulatory framework for supplemental capital that retains flexibility and provides for the appropriate regulatory discretion. The rigid approach adopted in the Credit Union Membership Access Act should give us insight into the impediments in the future if the statute restricts regulatory discretion.
Support for supplemental capital has reached a critical point. The system should act on this increasing momentum and push the issue on the Hill and among our peers in the system. It may not happen tomorrow, but I have great optimism that we can be successful. The unpredictability of the economy and the slow recovery demonstrate a need for this reform. There is great risk in doing nothing. We cannot wait for the perfect moment to go to Congress. It's time to act.
Mary Martha Fortney is president/CEO of NASCUS. Contact 703-528-8351 or firstname.lastname@example.org