BIRMINGHAM, Ala.—The advance notice of proposed rulemaking related to a supplemental capital rule that was just OK’d by the NCUA is a “first step” that will strengthen the credit union system and better protect the share insurance fund from losses, asserts Dennis Dollar.
But don’t expect the bankers to like it one bit, added Dollar, the former NCUA chairman who now leads Dollar Associates.
As CUToday.info reported here, the NCUA board Thursday voted 2-0 in favor of issuing an advance notice of proposed rulemaking on alternative capital for federally insured credit unions.
Dollar has been promoting and predicting that supplemental capital would be authorized in some form before 2020 in his widely presented CU 2020 industry presentation. In addition to a buffer against losses to the share insurance fund, Dollar sees alternative capital as a means to enhance investment in member service without adversely impacting capital ratios.
“NCUA is looking at supplemental capital options really because they have to,” said Dollar. “Almost half of credit unions are today low-income designated, which means they have the legal authority to issue supplemental capital instruments and have them count towards their 7% statutory net worth requirement. Without some guidance from a regulatory perspective as to what NCUA expects in a supplemental capital program, you could have credit unions structuring those programs in countless different manners.”
Answering Questions
The regulation, which starts with the ANPR process to gather input from the stakeholder, is essential to answer the questions of whether only members can be offered supplemental capital instruments, non-members, or both, said Dollar.
“Likewise, the limits and weighting of supplemental capital in order to not diminish the value of tier one retained earnings as net worth is crucial from a safety and soundness perspective for the industry,” continued Dollar. “It is a huge issue, a critically huge issue. NCUA is to be commended, after literally years and decades of study, for finally bringing forward the first step in what will ultimately result in a supplemental capital regulation that strengthens the credit union system and better protects the share insurance fund.”
Dennis Dollar
Dollar said credit unions should brace for strong opposition from the banking industry.
“If you think the bankers didn’t like the field of membership changes and the MBL revisions, they will be apoplectic over supplemental capital,” said Dollar. “One of their primary advantages in the marketplace is their access to the capital markets, and they will scream to high heaven that tax exempt credit unions should not be able to offer supplemental capital instruments even though that has nothing to do with the cooperative structure difference of credit unions and who owns all of the capital—the members. You can expect a major comment letter campaign from the bankers, and credit unions should make sure they speak out on this subject or the banker opposition will be the only voice heard.”
Going forward, the biggest issue NCUA will have to address is whether the subordinated debt instruments that will constitute the supplemental capital will be offered only to members, non-members or both, Dollar said.
“There are pros and cons to an all-member supplemental capital process and an all-non-member process,” said Dollar. “This will be one of the fundamental questions NCUA will face in moving forward with this regulation, as well as what limits and risk-weighting should be applied to the supplemental capital dollars on a credit union’s balance sheet.”
Regulation Can't Be ignored
Dollar explained that supplemental capital will only count towards the risk-based capital number for credit unions that are not low-income designated, but that it can count towards both RBC and statutory net worth for low-income credit unions.
“This existing authority for LICUs to offer secondary capital is the reason this regulation cannot be ignored by NCUA,” said Dollar. “Authorization guidelines, limits and specifications are needed to make supplemental capital programs—already authorized for almost half of the credit unions in America today—into something that works and achieves its purpose of protecting the insurance fund and enabling enhanced member service without adverse impact on capital levels.”