NCUA accelerates plan to give credit unions more access to capital

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The National Credit Union Administration board, in a move likely to hasten renewed conflict with banks, seems poised to fast track measures that would give credit unions more alternative capital options.

NCUA’s regulatory reform task force had initially classified alternative capital as a second-tier priority, meaning it might have taken two years for the agency to address it. But the agency's two-member board appears ready to expedite the issue. It approved a report Thursday calling for action on the issue by May.

Alternative capital is one of many issues drawing the ire of bankers.

The American Bankers Association continues to pursue a legal challenge to the NCUA’s field-of-membership rules. The association has also raised concerns about the NCUA’s proposed real estate appraisal rule, which would allow bigger commercial loans to be made without an appraisal.

“For years, NCUA has empowered itself to be a mini-legislature, repeatedly rebuked by courts for providing charter enhancement to credit unions when Congress will not,” Ken Clayton, the ABA’s executive vice president for legislative affairs and chief counsel, said in a statement Tuesday.

“Allowing capital from profit-seeking investors would be the latest example and only add to the already spiraling growth rates at large credit unions who call into question the very nature of their non-profit status,” Clayton added.

Allowing credit unions to pursue alternative capital would be nonstarter for banks, industry experts said.

“There are people that would look at capital as kind of the Holy Grail,” Peter Duffy, a managing director at Sandler O’Neill, said in an interview Monday. “Capital touches everything: earnings, growth, safety and soundness, ability to do mergers and acquisitions.”

NCUA regulations allow low-income designated credit unions access to what the agency terms secondary capital that, along with retained earnings, is used to calculate net worth ratios.

While the number of low-income designated credit unions has grown rapidly in recent years, totaling 2,561 at the end of the third quarter, few have taken advantage of secondary capital, with only $260 million on the books industry-wide at Sept. 30.

The NCUA has been mulling the idea of easing credit unions’ access to alternative capital for almost four years. In January 2015, when the board enacted a controversial risk-based capital regulation, it promised to follow up with a rule allowing any impacted institution to access supplemental capital. Such capital would be allowed to count toward a credit union's risk-based capital ratio.

In January 2017, the NCUA published a notice of advance proposed rulemaking, soliciting comments on supplemental and secondary capital. When the regulatory reform task force drafted an initial report in July 2017, however, it put alternative capital on the back burner.

The task force reversed course and gave the matter high priority after several commenters urged stronger action.

The NCUA recently set a Jan. 1, 2020 start date for its risk-based capital rule. As a result, movement this spring seems necessary if the agency hopes to also have an accompanying alternative capital rule in place.

While NCUA Chairman J. Mark McWatters didn’t comment on specific content in the report, he lauded the effort as “an example of regulatory transparency” during the board's December meeting.

“This is exactly what a federal bureaucracy should be doing,” McWatters said during Thursday's meeting. “They should not be steeped in mysticism.”

McWatters is on record as a strong supporter of alternative capital. Testifying before the Senate Banking Committee in October, he urged lawmakers to let alternative capital count toward the net income ratios of all credit unions.

“Only Congress can authorize alternative forms of capital that would count towards the statutory net worth ratio of a credit union without a low-income designation,” McWatters said during the hearing.

Alternative capital could have an immediate impact on mergers and acquisitions at a time when the industry is seeing a growing number of sizable combinations.

Expanded access to alternative capital could accelerate the pace of consolidation.

If the M&A uptick “proves a harbinger of things to come, [merging] credit unions could benefit from the ability to raise more capital,” Duffy said.

The regulatory reform task force has cautioned that drafting a viable alternative capital proposal comes with a “high degree” of difficulty, which may explain the lengthy deliberations that have already taken place.

Regulators prefer loss-absorptive forms of capital such as retained earnings and — for banks — equity, Duffy said. Subordinated debt, which will likely emerge as the primary form of credit union alternative capital, doesn’t fully meet that standard.

“It’s not as absorptive as retained earnings,” Duffy said. “Bondholders have rights.”

The “vast majority” of credit unions aren’t interested in alternative capital, and their sentiments probably won’t change, even if the NCUA produces new regulations, Duffy said. At the same time, many fast-growing, aggressive institutions might jump at an opportunity to fuel more expansion.

“The ones that want it want to use it to grow,” Duffy said.

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