Smaller Assets, Fewer Regs: Does Canada Offer Model for U.S.?

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NEW YORK-Could a regulatory model currently in place in Canada also work in the U.S. by helping to reduce the regulatory burden on small credit unions?

In Canada, the regulatory scheme allows for simplified regulations for cooperatives of less than $50 million in assets, along with supplemental capital, in exchange for adhering to more stringent lending and investment rules.

Andrew Poprawa, president/CEO of Deposit Insurance Corporation of Ontario, told Credit Union Journal that so-called "Class 1" credit unions cannot engage in business lending and must adhere to specific tables when making member loans or basic investments.

But, he noted, many of those institutions both in Canada and in the U.S. have been following similar business plans for years.

"It just makes it simpler to run a credit union," Poprawa said of the new governance structure, which the Canadian Parliament approved in October 2009.

Canada also allows members to purchase additional membership shares, up to $1,000 per member, to help CUs raise additional capital. Members do not gain additional votes but do earn additional patronage dividends paid for their extra shares. Poprawa said supplemental capital has been appealing to both members and regulators alike in the Canada, as it raises capital cheaply and effectively.

During the recent 1 Credit Union Conference in Las Vegas, co-hosted by CUNA and the World Council, the concept of such secondary capital was applauded by U.S. credit union leaders desiring to have the same authority.

"Members like it because they have the opportunity to invest in the CU for the long-term benefit of the community," Poprawa added. "We've discussed this with NCUA at the symposium last year to talk about supplementary capital in Canada and elsewhere. Credit unions are in a tough spot. The only way they can grow is to make gobs of money and put it into retained earnings."

NCUA has repeatedly said that the issue of supplemental capital remains closed for now.

The Canadian model of governance for small credit unions could work and do a great service for smaller institutions in the U.S., according to Cliff Rosenthal, president/CEO of the National Federation of Community Development Credit Unions in New York. Most of the Federation's membership falls below $50 million in assets.

An Intriguing Idea

"I think this an intriguing idea. The overload of regulations on the tiniest of institutions is enormous," said Rosenthal. "I think it is leading to the demise of many small CUs. It would almost take us back to a simpler day in the credit union movement."

Rosenthal pointed to precedent for regulators treating small institutions differently, noting that credit unions under $10 million are not required to stay compliant with GAAP. Many CUs, including Federation members that average $2.5 million in assets, will be at risk over the coming years due to capital restrictions and new regulatory requirements, he said. Simplifying the rules "would well worth taking a look at," said Rosenthal.

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