CUNA Mutual Group introduced a new secondary capital pilot project aimed at easing the way to broader acceptance of supplementary capital.
Under the project the credit union insurer will make supplementary capital infusions in credit unions by purchasing capital notes, subordinated debt with no voting rights, in selected credit unions.
The project is only aimed at qualified low-income credit unions or corporate credit unions, which are the only credit unions currently permitted to accept secondary capital and to count it as net worth under NCUA's prompt corrective action rules, known as PCA.
The pilot project is aimed at showing both credit unions and congressional leaders that alternative capital has a proper and safe place on the CU balance sheet, as it does for banks, according to CMG VP Larry Blanchard. Blanchard represented CUNA Mutual on an industry task force on alternative capital. "We really hope this paves the way to show Congress how this could work for all credit unions," he said.
The notes would be long-term in nature, up to 30 years in maturity, with the credit union-but not CUNA Mutual-having the right to call them, according to Blanchard. This would lend itself more to the form of capital. CUNA Mutual would have no voting rights, something that has given some credit union representatives pause because of the potential for diluting members' ownership.
Also Driving The Issue
This issue has come to the forefront lately as NCUA has expressed concern about the growing number of credit unions converting to banks, several of which have sold ownership to the public through initial offerings. The project also comes as credit unions are lobbying Congress to expand the forms of capital they may count under NCUA's PCA rules. Under HR 1151, the 1998 CU Membership Access Act that set statutory capital standards for credit unions for the first time, only retained earnings may be counted as net worth, or net capital.
Since then, net capital has become an increasing concern among credit unions due to the vast growth in credit union deposits over the past two-and-a-half years, which has diluted average net capital ratios by as much as 100 basis points (1%). Credit unions designated as "low-income" by NCUA have been allowed to accept alternative forms of capital and to count it as net capital for years.
Most of the alternative, or secondary capital flowing into low-income credit unions, estimated to be as much as $50 million, is comprised of grants and loans provided by banks in exchange for credit under the Community Reinvestment Act or by non-profit foundations like Ford or MacArthur, the Treasury's Community Development Financial Institutions Fund, or the National Federation of Community CUs.
Corporate credit unions are also allowed to issue alternative capital, like commercial paper, and to count it towards their federally mandated net capital rules.
