Clifford Rossi’s argument (Credit Union Capital Requirements Stifle Access to Credit) that credit unions’ secondary capital should count towards their net worth leverage ratio has one critical flaw – secondary capital is not core capital.
Secondary capital lacks an important characteristic that is associated with core capital – permanence. Secondary capital is subject to maturity limits, which means this form of capital is distinctly different and less reliable than internally generated capital. Therefore, any capital instrument that can mature should not be categorized as core capital.
Additionally, the inclusion of secondary capital as part of a credit union’s net worth would represent a significant divergence in the regulatory capital treatment of credit unions and banks. U.S. bank regulators are in the process of adopting the Basel III capital framework. Basel III requires increases in both the amount and the quality of regulatory capital relative to banks’ risks, including a greater reliance on common equity. The secondary capital instruments would not count as common equity under the Basel III framework.
If credit unions want access to capital, there is an alternative: they can switch to a mutual savings bank charter. This would give the freedom to raise capital, while retaining their cooperative structure.
Keith Leggett is vice president and senior economist for the American Bankers Association.