The National Credit Union Administration is moving gingerly toward regulatory changes that could make it easier for credit unions to tap alternative forms of capital—but could also stir up yet another hornet's nest with bankers.
The NCUA already is battling significant, banker-backed legal challenges to changes it made recently to regulations governing member business lending and fields of membership. Alternative capital has the potential to be every bit as much of a hot button — if not more so.
The agency held an informal briefing on the subject in October and followed up by retaining a law firm to advise it on securities law implications. On Thursday, NCUA's two-member board took another small step, approving an advance notice of proposed rulemaking.
While agency officials have provided few details as to what shape a proposed rule might take, the move signals the likelihood one will be forthcoming later this year. It also opens a 90-day window for public comments once the notice is published in the Federal Register.
Banker groups did not immediately react to the NCUA vote or return calls seeking comment, but they are on record as opposing any expansion of credit union powers, including supplemental capital.
Opposition could come from within the credit union industry as well. Even though a number of credit unions called for liberalized access to alternative capital following the board's approval of tougher risk-based capital standards in November 2015, many others "have no interest in issuing new forms of alternative capital," Rick Metsger, the board's Democratic chairman, said Thursday.
"Many credit unions are already well-capitalized and see no need for additional capital," Metsger said.
Metsger, moreover, acknowledged that permitting easier access to alternative forms of capital, especially supplemental capital that credit unions could use to bolster their risk-based ratios, opens the industry up to questions about its identity as member-owned.
"Even if your credit union does not need and/or has no interest in issuing alternative capital, we do need to hear from you because the decisions we make affect the share insurance fund and impact, frankly, the fundamental question of what it means to be a credit union," he said.
Like Metsger, Republican board member Mark McWatters also called for as wide a spectrum of comment as possible.
"You'll be the ones, not us, issuing these forms of capital," McWatters said. "If they don't work for you, if they don't work in the marketplace, if your investors cannot earn a risk-adjusted rate of return where they're willing to buy the capital and if you cannot employ the capital … then all this is for naught."
As things stand now, retained earnings are the only form of capital available to most credit unions. The agency said if some form of supplemental capital is established, the relatively small number of credit unions that might be in need of additional capital once the risk-based capital rule is implemented might issue as much as $1 billion in supplemental capital in fairly short order.
Credit unions with a low-income designation are permitted by the Credit Union Membership Access Act to issue uninsured secondary capital provided it is subordinate to all other claims on the issuer, including creditors and the NCUA Share Insurance Fund.
Although the number of low-income designated credit unions has exploded in recent years, jumping from 1,119 at the end of 2011 to 2,426 in June 2016, only a relative handful have taken advantage of the secondary-capital option. As of June 30, a total 73 credit unions reported holding $181 million of secondary capital.
Along with changes to its secondary capital regulation, the board is also mulling plans to allow all credit unions to issue supplemental capital that would count toward the risk-based capital requirement. NCUA officials estimate that institutions might seek as much as $1 billion in supplemental capital if allowed.
The main difference between the secondary capital available to low-income credit unions and the supplemental capital option lies in their treatment under the Credit Union Membership Access Act. Since the law requires secondary capital to be subordinate to all claims, the NCUA will have to craft its supplemental capital rule in a way that makes it senior to secondary capital.
The major credit union trade associations applauded the board's decision to move forward with a notice of proposed rulemaking.
Carrie Hunt, general counsel at the National Association of Federally-Insured Credit Unions, said her organization would "continue to advocate for legislation that would create a fair capital system providing, among other things, access to additional capital for all credit unions, regardless of charter type."
National Association of State Credit Union Supervisors CEO Lucy Ito said she was encouraged by the board's vote, "particularly since it holds the potential for synchronizing federal rules with existing authorities already on the books for credit unions in 15 states."
Though Metsger pointed to the fact that not all credit unions are in favor of supplemental capital, a number of credit union advocates have noted the importance of getting some form of supplemental capital on the books before the agency's risk-based capital rule goes into effect Jan. 1, 2019.
