SAN FRANCISCO-The very fact that many credit unions don't need access to supplemental capital right now is the reason now is the time to push for it, several CU leaders suggested.
"Supplemental capital is an at-risk liability or equity account that acts as a buffer to the share insurance fund," said Troutman. "U.S. banks and thrifts have access to supplemental capital, but credit unions, with few exceptions, do not. Corporate credit unions and low-income designated credit unions do have access to supplemental capital."
NASCUS recently asked the Filene Research Institute to study supplemental capital. Study author Robert Hoel, a professor emeritus of business at Colorado State University and Filene fellow in residence. Among the conclusions:
* Federal and state laws should be amended to permit alternative capital.
* CUs can expand their capital bases using alternative capital in ways that will not dilute their mutuality.
* Some of the most promising alternative capital methods involve obtaining capital from outside investors or acquiring special, long-term deposits from members.
* There is no single method that is best for all CUs seeking alternative capital.
* It would be appropriate for regulators to review a CU's alternative capital plan prior to issuance of alternative capital instruments.
"Steps should be taken promptly to repeal or reform statutes and regulations that prohibit credit unions from obtaining alternative capital. No compelling reasons to delay were uncovered during the course of this research."
Elizabeth Dooley, CEO of Educational Employees CU in Fresno, Calif., noted the U.S. Treasury Department has been focused on banks for several months. The former deputy commissioner of credit unions for the California Department of Financial Institutions said, "Given the current economic environment, alternative capital has been brought to the fore. If one credit union takes [TARP] money, we as an industry can no longer say no credit union has ever taken a penny of taxpayer money."
Dooley said she believes CUs should not be allowed to sell alternative capital instruments to their members. "If we go forward down this road, there need to be limits," she warned.
As for looking outside CUs for investors, Dooley said if people are willing to invest in credit unions, the ability to raise capital in a short amount of time would be beneficial. However, she remains concerned about a loss of managerial control, in the case of investors who insist on a board seat and/or voting rights.
"There also is the issue of greater transparency," she observed. "Credit unions would have to do a lot more disclosure to those investors than they currently do. Is there a market? If so, what would the price be? And will there be money over and above what is needed for business purposes?"
According to Dooley, it is difficult to envision Treasury taking a stake in a CU. "But no one envisioned the current economic environment 12 to 18 months ago. If we don't do something now to potentially avail ourselves of the option in the future, we are not doing our jobs."
Jim Updike, CEO of Torrance, Calif.-based Honda FCU, said risk mitigation credit is "almost" capital relief for CUs.
Current risk-based net worth requirements call for CUs to have a net worth ratio of at least 6%, Updike noted. A ratio of 6% to 6.99% is defined as "Adequately Capitalized" while 7% or above is "Well Capitalized." Interest Rate Risk Mitigation Credit, or IRRMC, is a credit of up to 100 basis points dependent on the ability of a CU's balance sheet to withstand "...an immediate and sustained parallel shift in market interest rates of plus or minus 300 basis points to its net economic value (NEV)."
"An IRRMC says how much or how well a credit union's balance sheet would withstand interest rate shock," Updike said. "A Credit Risk Mitigation Credit, or CRMC, is a credit available if a credit union can demonstrate reduced risk in member business loans, long-term real estate loans or loans sold with recourse."
To obtain an IRRMC, in addition to interest rate shock impact the applicant credit union must show how it plans to measure interest rate risk, list its data inputs and assumptions, and its model capabilities and validations.
Updike said NCUA assigns a qualitative rating upon approval of the application: a number between 0.00 and 1.00. A figure of 0.00 is classified as "Excessive Risk," 0.25 is "High Risk," 0.50 is "Significant Risk," 0.75 is "Moderate Risk and 1.00 is "Minimal Risk."
"This is a means to help, but we need meaningful capital reform including alternative methods of capital," Updike said. "One role corporates could play is as brokers for capital, as they do with liquidity."
