By Lucy Ito
A regulatory proposal on supplemental capital has been years in the making, overcoming apathy in some corners of the credit union system, antipathy in other corners, distraction by the varied issues of the day (including risk-based capital), and even a freeze on new regulations by President Donald Trump.
Yet, despite all of that, movement on supplemental capital for credit unions – in the form of comments on an advance notice of proposed rulemaking about the issue -- is now taking place, thanks to the leadership of NCUA Acting Chairman Mark McWatters and Board Member Rick Metsger.
And that means opportunity for the state credit union system – long sought by NASCUS – to speak up on this important tool for credit unions and their future, through the filing of comments in response to this proposal.
In fact, it’s the best opportunity we’ve had in 20 years – and it deserves input from everyone.
On Feb. 8, a 90-day comment period opened on NCUA’s ANPR on “alternative capital.” The title reflects the fact that the proposal addresses two different categories of capital: Secondary capital and supplemental capital. As the proposal notes, secondary capital is currently permissible under the Federal Credit Union Act (Act) only for low-income designated credit unions to issue and to be counted toward both the net worth ratio and the risk-based net worth requirement of NCUA's prompt corrective action standards. The board is considering changes to the secondary capital regulation for low-income designated credit unions.
Much To Be Considered
Additionally, the board’s proposal contemplates creating a regulatory capital mechanism by which non-low income credit unions can use supplemental capital to meet risk-based net worth ratios. Overall, the proposal is a big step toward a long-standing goal of NASCUS and the state credit union system: capital reform for credit unions as a tool for enhancing safety and soundness.
When the board took action at its Jan. 19 meeting, I said the state system was encouraged, particularly since the proposal holds the potential for synchronizing federal rules with existing authorities already on the books for credit unions in 15 states.
And I also noted there is much to be considered in the 50-page proposal, particularly the challenges it outlines. I said then, and I still believe, that the state system is confident these challenges can be overcome–and that credit unions will ultimately have access to the tools they need to maintain safe capital levels during good and bad economic times.
My confidence is rooted in the long-term commitment by the state system and NASCUS to bring about supplemental capital for the credit union system generally. At NASCUS, our view for the past nearly 20 years has been that a capital structure limited exclusively to retained earnings significantly disadvantages credit unions in facing unexpected economic shocks, and penalizes well-run institutions that are dealing with the ups and downs of the economy, such as simply attracting deposits too quickly from consumers in a “flight to safety” that credit unions offer.
For example, under today’s system, a credit union that is successful in attracting deposits may find itself in regulatory trouble if its earnings do not increase at the same pace as deposits. The new deposits increase the credit union’s assets, which can deplete its net worth ratio and trigger statutory action from regulators. In fact, with possible inflation on the horizon, we may soon again see that phenomenon arise anew. From that point of view, the board’s proposal is well timed.
Words Still Resonate
A further example of our long-term commitment: 10 years ago, NASCUS supported a project by the Filene Research Institute to take a close look at alternative capital. Titled Alternative Capital for U.S. Credit Unions? A Review and Extension of Evidence Regarding Public Policy Reform, the project (overseen by long-time Filene research stalwarts Bob Hoel and George Hofheimer) reported eight key findings – the first of which was “it is in the public interest to permit credit unions greater access to alternative capital sources.”
But it’s a paragraph in the forward of the report by the aforementioned Hofheimer that truly sums up what is at stake right now. It states: “One of the most extraordinary issues related to this topic is the dearth of capital formation tools at the disposal of most U.S. credit unions. Cooperatives and credit unions around the world have figured out how to access alternative forms of capital without diluting the core ownership structure of their organization. Additionally, investor- owned financial services firms have seemingly unlimited options and access to capital. This puts U.S. credit unions at a potential disadvantage because they operate in an environment where financial services consumers are demanding more delivery channels, higher levels of service, and more product choices.”
Ten years later, George’s words continue to resonate.
Certainly the credit union system has its work cut out for it if it wants to reach the sort of statutory capital reform that the Filene researchers envisioned (such as allowing for supplemental capital for standard prompt corrective action net worth requirements).
But McWatters and Metsger have given the state system –and, indeed, the credit union system at large – a terrific opportunity to bring about positive change for credit unions with regard to acknowledgment and acceptance of supplemental capital. To that end, NASCUS urges state credit unions to file comments by May 9, and take the next step toward achieving a long-sought goal.
Lucy Ito is president of the National Association of Credit Union Supervisors (NASCUS). For more info: www.nascus.org.