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WASHINGTON-Information regarding credit unions and capital, ranging from positive to not so positive, was a hot topic in both the credit union and banking communities. Most of the credit union community seems to be united behind creating a system of risk-based capital for credit unions similar to the banks. NCUA Chairman JoAnn Johnson called the agency’s first Summit on Credit Union Capital at its Alexandria, Va. headquarters this year and asked interested credit union parties to testify. Though Johnson said she strongly supported a risk-based capital structure for credit unions, she admitted that legislative changes are necessary. NCUA Board Member Debbie Matz has also expressed support for a risk-based system. Credit unions have complained that strict and too highly placed PCA leverage ratios have restricted credit union growth. A risk-weighted system would place more importance on what ventures carry more potential for problems. At the summit, corporate credit unions explained how a risk-based system is possible for corporates without legislative change and that it would strengthen the entire credit union community. State Employees Credit Union CEO Jim Blaine, representing NASCUS, said credit unions’ average capital level at over 10% is too high and is “wasteful.” CUNA witness, USA Federal Credit Union President and CEO Mary Cunningham, noted that Prompt Corrective Action is a valuable tool, but that the capital ratios are forcing credit unions to take action much earlier than necessary. NAFCU has consistently been a backer of risk-based capital, but has yet to find a practical form of alternative capital that would not compromise credit unions’ philosophy. The National Federation of Community Development Credit Unions complained that once secondary capital investments reach five years to maturity, 20% of the notes becomes a liability each year. Eliminating this discounting would help the low-income credit unions out and make the investments more attractive to investors. Alternative capital is another, much more controversial issue that credit unions have been looking into. As a study from the Government Accountability Office found in September there is “no compelling need” for alternative forms of capital for credit unions at this time and pointed out that there is not even consensus within the industry. The report also said that the experience of low-income credit unions with secondary capital was too unique and not sufficient to represent what would happen if it were permitted for all credit unions. GAO found that in the three calendar years since PCA was placed on credit unions, they have grown at a faster rate than banks and thrifts. One of the arguments of proponents of secondary capital has been that some credit unions have turned away members to maintain the necessary capital levels. NCUA concurred that the case for secondary capital had not been made but that PCA reform is necessary. The bankers jumped on this study as supporting their claims that credit unions cannot abandon the cooperative structure and maintain their tax-exemption. In response to the feedback Johnson received at the Capital Summit, she introduced three proposals that she wants the agency to look into. First would be to reduce the required net worth ratio for RegFlex eligibility from 9% to 7%. Johnson also suggested that low-income credit unions should have the option to release the 20% discounted from secondary capital investments after it becomes a liability. Finally, she said she would like the agency to pursue a risk-based capital system for corporate credit unions. The credit union community reacted overwhelmingly favorably to the proposals, though Matz questioned whether the RegFlex ratios should be changed prior to any legislative action on the PCA ratios. [email protected]

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