Even before a proposed rule has been crafted, the regulator’s exploration of alternative capital for credit unions already has bankers spoiling for a fight.
The National Credit Union Administration’s comment period on a notice of proposed rulemaking on alternative capital ended May 9, and agency officials have only just begun going through the more than 750 letters filed, but when the agency eventually releases a draft, it’s
“When I was at ABA, bankers clearly viewed this as something that would change the game,” Leggett said Thursday in an interview. “In their view, credit unions don’t get [access to alternative capital] without giving up their tax exemption.”
While it’s highly unlikely credit unions would ever willingly bargain away their federal tax exemption, obtaining broader access to capital markets would represent a significant change to the status quo.
Unlike banks, which can tap into the capital markets at will, the Federal Credit Union Act defines earnings as the sole source of capital for most credit unions. There is one current exception: low-income designated credit unions are permitted to issue what the Act describes as “secondary capital accounts” -- but just a handful have taken advantage of the option.
A total of 77 credit unions reported $180 million of secondary capital on their books at the end of 2016. That compares with 5,785 total institutions and $141 billion of retained earnings, according to NCUA.
“We have researched the potential market at some length. Based on our review no viable market currently exists,” Keith Sultemeier, president and CEO at Kinecta Federal Credit Union, a $4 billion-asset, low-income-designated credit union in Manhattan Beach, Calif., wrote in a May 3 letter.
Sultemeier, however, added a market could well develop if access were broadened. Indeed, despite the seeming lack of appetite for alterative capital today, a number of institutions submitted letters strongly supporting allowing broader use of alternative capital. It would provide an additional avenue for growth and serve as an added buffer in difficult times, they argued.
“Credit unions facing pressure on capital levels have few choices, other than increasing fees, making loan rates less attractive or shrinking assets,” Mike Ryan, general counsel at $17.2 billion-asset Boeing Employees Credit Union in Tukwila, Wash., wrote last month. “Therefore, allowing for supplemental capital…is even more important for federal credit unions than other financial institutions.”
In a May 9 letter, Alaska USA Federal Credit Union Chief Risk Officer Cory Schwab highlighted the potential spur to growth alternative capital could offer. “It could assist with credit union product diversification, geographic expansion, and merger activities through strategic balance sheet positioning,” Schwab wrote. “This would allow the industry to strategically plan for future periods while enhancing membership offerings.”
Out of the dozen credit union CEOs who submitted letters, only one opposed greater access to alternative capital. Steve Brown, CEO at $42.8 million-asset Alcoa Community Federal Credit Union in Benton, Ark., said experience working in the savings and loan industry gave him a unique insight into how “good intentions of deregulation…killed that industry, hurt the national economy and harmed consumers in general.
“I feel strongly that the credit union industry as a whole is pushing hard for regulatory relief that would allow stronger competition with the commercial banking industry and are losing sight of the unique nature of the industry,” Brown added in a May 3 letter.
The two biggest credit union trade associations, Credit Union National Association and National Association of Federally-Insured Credit Unions, both strongly endorse additional capital options – so long as credit unions are given wide latitude to develop the types of instruments ultimately offered to investors.
CUNA urged NCUA to permit what it termed “limited experimentation,” permitting individual credit unions to figure out which capital instruments were best suited to their markets. “We recommend that at this stage, the rule not limit permissible supplemental capital instruments to one or two restrictively defined instruments,” Andrew Price, the group’s senior director of advocacy and regulatory counsel wrote Wednesday.
NAFCU went even further, suggesting a pilot program involving well-run and well-capitalized credit unions. Officials could examine their experiences with alternative capital to determine “best practices that could benefit the entire industry,” Executive Vice President of Government Affairs and General Counsel Carrie R. Hunt wrote Tuesday.
NAFCU’s call for a pilot program was echoed by Gary A. Grinnell, president and CEO of $1.4 billion-asset Corning Credit Union in Corning, N.Y.
Bankers, not surprisingly, against any sort of alternative capital for credit unions. The American Bankers Association, which is
“Instead, NCUA should be encouraging—and facilitating—conversions of credit unions to federal mutual savings bank charters should these institutions wish to expand their access to capital or their scope of operations,” Brittany Kleinpaste, ABA’s director of economic policy and research, wrote in the group’s May 9 letter.
James Kendrick, first vice president of accounting and capital police at the Independent Community Bankers of America, likened alternative capital to member business lending, the issue over which
“Alternative capital will be used to lever capital and make more member business loans,” Kendrick said Friday. “It turns otherwise narrowly focused credit unions into commercial banks that avoid paying taxes.”
While credit unions have long sought access to additional sources of capital, the issue has taken on renewed importance in recent years due to NCUA’s adoption of a risked-based capital regulation that will require “complex” credit unions with riskier business models to hold additional capital. And while the Federal Credit Union Act prohibits alternative capital from being considered in net worth calculations, it could be used to satisfy risked-based capital requirements.
