Credit unions have worked very hard over the past few years and have seemingly come through the worst economic times since the Great Depression. We as an industry are still able to say that we did not need the government to bail us out, and that credit unions are still on relatively strong financial footing. Credit unions should be proud of the way we have supported one another and provided our cumulative strength to keep our industry independent of taxpayer money.
Last week Representative Peter King (R-N.Y.) introduced a bill (HR 3993) that would give the NCUA authority to improve credit union safety and soundness through the introduction of secondary capital. The timing couldn’t be better. Even the healthiest credit unions bore the brunt of NCUSIF premiums and corporate capitalization deposits, and all but a few have a lower net worth today than they did two to three years ago.
Now, interest rate spreads are very narrow, and there is only one way for rates to go. In a rising rate environment, we all know that the deposits will re-price quickly and the loans and assets not so quickly, making profitability very difficult and the growth of retained earnings a challenge. At the same time, the American public has begun to see all the good that credit unions are doing, and deposits are on the rise, creating terrific growth opportunity for credit unions and adding to total assets. Acting now before these pressures mount is not only appropriate but wise and prudent.
The fact is that now is the time for some innovative viewpoints on capital, in order for credit unions to sustain this growth and not weaken net worth to asset ratios, thereby protecting the American taxpayer and the not-for-profit, cooperative, consumer-oriented financial alternative to traditional banks.
Although banks have said they would not oppose any measures that would add to safety and soundness of the financial system, they will certainly oppose this because it will allow credit unions to grow and allow credit unions to stay strong and vibrant. This time, Congress should not listen to the banks because safety and soundness trumps all, and the banks themselves have cost the taxpayer billions through their inability to properly capitalize their institutions. Meanwhile the credit union industry stands united with CUNA, NAFCU, NASCUS and AACUL behind this bill. That is refreshing to say the least.
Are there drawbacks to secondary capital? Sure. It can be expensive, and if not properly administered by the NCUA, it could provide influences to credit union decision making that are contrary to our mission. Certainly as a longtime credit union person, no one will jump up quicker to protest than I if the structure or mission of our great industry is compromised. But to not make the option of secondary capital available and to not allow the NCUA to draft up the appropriate rules that could prevent such influence would be short sighted and would certainly not be consumer sensitive. In the end, I am confident that the industry and the regulator can find the right way to do this.
Community development credit unions have served America’s most needy consumers and have relied on secondary capital for years. To the best of my knowledge, as a volunteer for the National Federation of CDCU’s, I have not seen where the mission has been diluted because of secondary capital. And the infusion of such capital in many cases has allowed these institutions to do a fabulous job of reaching out to underserved communities and some very deserving consumers who would perhaps otherwise not have a chance. Why should mainstream credit unions not have the same opportunity?
It is time for Congress to take note of how responsible credit unions have been, how well we have reached out to and supported consumers in this difficult economy and allow us to find a way to continue to operate as safe, sound, financial alternatives to banks. The time for secondary capital is now, when a calm and thorough approach to this issue can be utilized and not at some crisis point in the future that never has to happen.
The Summit FCU