WASHINGTON-Despite unanimous support from the three-member NCUA Board, NCUA has backed off its previous efforts to get a risk-based capital system and supplemental capital authority passed in Congress, virtually dooming any effort at capital reform for this year.
NCUA's latest position came to light last week after the release of a long-awaited task force report on supplemental capital that was generally positive but was careful to avoid any direct backing of supplemental capital authority for credit unions. Instead, the paper mentioned several times that supplemental capital is "an appropriate policy consideration."
The capital issue is a growing concern for many credit unions, both troubled institutions and those that are fast growing. Fast growing credit unions, for example, are seeing their net worth ratios diluted because of major inflows of assets/deposits.
Support, But...
An NCUA task force report is not expected to be formally endorsed by the NCUA Board-even though all three board members have endorsed the idea separately-and NCUA is not expected to pursue the matter with Congress, according to Board Member Gigi Hyland, who chaired the NCUA Supplemental Capital Working Group.
"I don't have an expectation that the NCUA Board will pursue this (with Congress)," said Hyland, who asserted her own support for supplemental capital.
Hyland and the other two NCUA Board members have expressed their support for supplemental capital in public appearances. During her speech at CUNA's Governmental Affairs Conference Matz told credit union executives, "I believe that you should be able to gain access to supplemental capital to help relieve the pressure that all those new deposits put on your capital ratio."
On Dec. 7, Matz sent a letter to House Financial Services Chairman Barney Frank stating "I encourage Congress to consider authorizing qualifying credit unions, as determined by the NCUA Board, to issue alternative forms of capital to supplement their retained earnings."
Without NCUA's formal endorsement any effort to get a supplemental capital through Congress is extremely doubtful. Such a measure would also need an endorsement from the Treasury Department, which has also not signed on.
Not a Good Time to Ask
In addition, NCUA and the credit union trade groups have ceased working on convincing Congress to enact a risk-based capital system for credit unions that would lower the leverage for credit unions because of political calculations. Those calculations are that with hundreds of financial institutions on the brink of failure Congress is discussing raising capital limits, according to Ryan Donovan, senior lobbyist for CUNA. "The conventional wisdom is focused on raising capital (standards) for banks and insurance companies" making it a bad time to be asking for lowered capital standards for credit unions, he said.
John Magill, chief lobbyist for CUNA, said the expectation is that once Congress finishes work on the omnibus financial reform package now in the Senate, there will be little major financial legislation voted for the remainder of this year. "It's a short legislative calendar," said Magill.
Supplemental capital, sometimes called secondary or alternative capital, has been debated within the credit union movement as far back as 1996 during the lobbying on HR 1151, the CU Membership Access Act. But credit union executives have been split on several issues, including the impact that raising additional capital from outside sources could have on the mutual ownership of credit unions, and by extension the sacrosanct federal tax exemption for credit unions. But the growing financial crisis and the impact of the corporate credit union meltdown, which has trickled all the way down to natural person credit unions, has added urgency to the matter.
A Long Climb
Brad Thaler, senior lobbyist for NAFCU, said his group will continue to pursue supplemental capital legislation but he admitted it is a "tall mountain to climb," especially without NCUA support.
The NCUA report noted that many fast-growing credit unions have seen their net worth ratios decline as their deposits increase, putting regulatory pressure on some of the best-run credit unions. In its report, the NCUA panel said supplemental capital should be joined with a risk-based capital system for credit unions as part of capital reform.
Three Potential Forms of Capital
The NCUA report outlined three potential forms of supplemental capital which could be counted as net worth: Voluntary Patronage Capital, Mandatory Membership Capital, and Subordinated Debt. Voluntary Patronage Capital would be uninsured instruments offered to individual, but not institutional, members; Mandatory Membership Capital would be required of all members, kind of like the corporate credit unions do, and would also be uninsured; and Subordinated Debt would have a five-year minimum initial maturity or notice period with no early redemption option for the investor and would be limited to institutional investors.
The NCUA group acknowledges some of the controversy surrounding the issue of supplemental capital including the potential dilution of members' voting and the recent experience with failed corporate credit unions, U.S. Central FCU and WesCorp FCU, which wiped out their supplemental paid-in-capital and membership capital shares.
