Credit union industry lobbyists are not letting a Government Accountability Office report halt their campaign to ease what they call a looming capital crisis at many of the country’s best-run and fastest-growing credit unions.
The 55-page study, published last week, found “no compelling need” to let credit unions raise capital from investors. But one of the industry’s leading voices on Capitol Hill said that conclusion might actually strengthen the case for another initiative credit unions are pushing that would establish a risk-weighted capital ratio.
Brad Thaler, the director of legislative and political affairs for the National Association of Federal Credit Unions in Arlington, Va., said the GAO (formerly the General Accounting Office) was careful to distinguish the subject of risk-weighted capital, which it termed “less controversial,” from the investor-capital issue.
The report “differentiates the risk-weighted approach from secondary capital,” he said. “In that context, it may even be beneficial.”
While there are currently no bills in Congress to give credit unions the authority to raise capital from investors, the Credit Union Regulatory Improvement Act, or HR 3579, includes a proposal to establish a risk-weighted capital system.
Mr. Thaler said the bill has little chance of passing this year, but he also said that it could be reintroduced next year, and that the attention the subject has received as a result of the report would make it easier to move the bill through Congress.
A risk-weighted capital system, similar to the one banks use, would allow credit unions to reserve less capital against less risky assets, such as residential mortgages.
His comments put a positive spin on a report that banking groups were quick to characterize as major defeat for credit unions. Lobbyists and economists for bank groups hailed the report as a kind of milestone in their fight to rein in credit unions.
Bankers have not had much success lately in their effort to keep credit unions from diversifying. Over the past two years the National Credit Union Administration has loosened restrictions on membership and small-business lending. And the Small Business Administration has amended its rules to allow credit unions to participate in its flagship 7(a) loan guarantee program.
“You can feel a slight shift in momentum for the first time in many years,” said Ron Ence, the vice president of congressional relations at the Independent Community Bankers of America in Washington. The report “exposes the hypocrisy of” credit unions “wanting to be a bank in every way except taxes and the Community Reinvestment Act.”
Keith Leggett, an economist with the American Bankers Association, called the report a good study of credit unions. “Our viewpoint is that it illustrates that the argument being made by the credit union industry is erroneous,” he said. “As the GAO said, there are no compelling reasons to make changes” to the capital rules.
Credit union groups complain that the Prompt Corrective Action rules that govern the industry are putting some of the most successful credit unions in a tough bind. They are growing rapidly, but the rules require them to maintain a capital-to-earnings ratio of 7% to maintain their status as well-run, well-capitalized institutions. The only way they can do that is through retained earnings, which many credit unions are not generating fast enough to keep up with their asset growth, officials say.
“We’re continuing to explore ways to get out of that straightjacket,” said John McKechnie 3d, the senior vice president of governmental affairs for the Credit Union National Association.
Credit unions whose capital-to-assets ratios fall below 7% lose their well-capitalized status. Those whose ratios fall below 5% face tough regulatory sanctions.
Banks and thrifts, by contrast, are considered adequately capitalized if they maintain a capital-to-assets ratio of 4%. Moreover, banks and thrifts can raise capital from investors as they see fit.
According to Daniel J. Mica, the CUNA’s president and chief executive officer, 15% of the credit unions currently categorized by regulators as well managed and well capitalized are in danger of bumping into the capital limits imposed by the Prompt Corrective Action rules.
“They are right to be looking for some sort of solution to a looming issue,” he said in a press release issued last week.
Mr. McKechnie said that as credit unions get closer to the capital limits, they are forced to slow their growth. Though he did not name specific institutions, he said he knows of credit unions that have stopped accepting jumbo certificates in order to put the brakes on their expansion.
However, the GAO report noted that credit unions have enjoyed robust growth over the past three years, even with the Prompt Corrective Action rules in place.
“Credit unions have maintained capital levels well above the level needed to be considered well capitalized and have grown at rates exceeding those of other depository institutions during the three calendar years that PCA has been in place for credit unions,” the report said.
It also said that allowing credit unions to raise investor capital would call their status as nonprofit, member-owned cooperatives into question. The move could create safety-and-soundness issues if insider investors provided poorly managed credit unions with capital infusions that enabled them to acquire stronger institutions, the report said.
Even so, credit union lobbyists said they were determined to continue pressing the issue.
“This report was not the last word on secondary capital,” Mr. Thaler said.
Mr. McKechnie said the GAO’s findings “in no way dictate the outcome of this issue.”
However, he also said the credit union industry faces an uphill slog in its effort to win the right to raise investor capital. “Right now, there’s not a lot of support.”
More importantly, perhaps, Rep. Brad Sherman, D-Calif., one of the three lawmakers who asked the GAO to conduct the study, indicated that the result was not to his liking.
“It’s hard to make an argument against capital,” he said in a press release Sept. 8, the day after the report was released. “I don’t know anyone who says, ‘Well, financial institutions should be deprived of a tool to be capitalized.’ ”
