Credit unions could accept supplemental capital that wouldn’t be insured by NCUSIF and would be subordinated to other claims, according to provisions of a bill introduced by Rep. Peter King (R-N.Y.) and Rep. Brad Sherman (D-Calif.).
Under the measure, credit unions could accept nonshare capital accounts and could use the money to cover operating losses in excess of their retained earnings. The accounts would be subject to maturity limits set by a credit union’s board. In addition, the law mandates that the accounts would be subordinate to all other claims against the credit union, including those of creditors, shareholders and the NCUSIF.
The NCUA would have the power to determine whether a credit union is “sufficiently capitalized and well-managed” to be eligible to accept the capital.
The measure has been referred to the House Financial Services Committee, which hasn’t taken any additional action. It’s not clear whether there will be any movement on the bill this year.
“We want to start the conversation on this issue,” said CUNA Senior Vice President Ryan Donovan. “This is something that some credit unions care about and we want to make folks on Capitol Hill familiar with its importance.
NAFCU President/CEO Fred Becker echoed those sentiments and said the legislation represents the principles agreed to during negotiations among the industry’s trade groups.
“It preserves the not-for-profit, mutual, member-owned and cooperative structure of credit unions and ensures that ownership remains with the credit union’s members,” he said.
Last year, NCUA Chairman Debbie Matz wrote lawmakers that allowing non-low-income credit unions to accept supplemental capital would let “well-managed credit unions better manage net worth levels under varying economic conditions.”
The agency hasn’t taken a position on the King-Sherman bill.
CUNA Chief Economist Bill Hampel said if the measure is passed, it would take some time before investors become familiar with credit unions as a desirable place for their money.
“Credit unions have a great story to tell because they are generally well managed and well capitalized, but investors don’t think of credit unions as a place to park their money. Also, because credit unions are smaller they may not be appealing on an individual basis. However, if they combine forces and set up an investment pool that will make them more appealing,” he said.
If credit unions want to be allowed to accept supplemental capital, they should agree to pay federal taxes, said American Bankers Association Vice President and Senior Economist Keith Leggett.
“It’s another attempt by credit unions to be more like banks. And if they want to do that they should pay taxes, it’s a fair tradeoff,” he said.
Leggett said the bill also raises safety and soundness concerns.
“Allowing a credit union to issue supplemental capital eliminates the prompt corrective action tripwire aimed at slowing down rapid growth and extensive risk taking,” he added.
In a 2010 study on the subject led by NCUA Board Member Gigi Hyland, the agency concluded 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.”
So far the bill has four co-sponsors: Rep. Bob Filner(D-Calif.), Rep. Larry Kisssell (D-N.C.), Rep. Greg Meeks (D-N.Y.) and Rep. Ron Paul (R-Texas).