Supplemental Capital Plan Draws Fire from Credit Union Foes

A working group convened by the chairman of the National Credit Union Administration is applying the finishing touches to a rule that could allow credit unions to count certain forms of debt as capital.

Debbie Matz, who assembled the group in December, told an audience of credit union executives attending the National Association of Federal Credit Unions' annual conference in Montreal last week that the supplemental capital rule would be unveiled this fall. She added that the rule's effective date would coincide with the NCUA's planned phase-in of a risk-based capital plan in 2019.

"I understand the need for supplemental capital in certain circumstances," Matz said. "As part of modernizing risk-based capital, I am committed to counting supplemental capital in full."

Letting credit unions tap secondary sources of capital would likely lead to accelerated growth for an industry that increased loans last year by 10.4%, to $722 billion, according to NCUA data. Total loans increased by another 1.4% in the first quarter. In comparison, the banking industry's total loans rose by 5.2% last year, to $8.3 trillion.

The banking industry's reaction to the speech was swift.

"We are profoundly disappointed that the [NCUA] has again displayed a desire to act as a cheerleader for the industry it is charged with supervising," Frank Keating, president and chief executive of the American Bankers Association, said in a statement Friday.

"After the credit union industry lobby failed to get supplemental capital authorized by Congress, NCUA is now apparently prepared to do it anyway," Keating added. "Congress should be on full alert and be very concerned about NCUA's actions."

The supplemental capital proposal raises serious questions about credit unions' status as financial cooperatives, said Keith Leggett, a retired ABA economist who blogs about credit union issues. Leggett raised the specter of individual or institutional investors insisting on covenants or other restrictions as a condition of their investment.

"It's a big issue once you're out there issuing secondary capital," Leggett said.

For now, retained earnings are the only source of capital that can be used to calculate the net worth ratio for credit unions that have not received a low-income designation from the NCUA. That restriction, put in place by the Credit Union Membership Access Act of 1998, can only be altered by Congress. The NCUA, however, has the authority to establish a second, risk-based capital ratio that can include supplemental capital.

Matz, who noted that nearly half of all credit unions have the low-income designation that allows them to raise supplemental capital, said she wants to see the privilege extended to the entire industry. "Another goal for this working group is to discuss potential legislative and regulatory changes that could benefit all credit unions interested in raising supplemental capital," she said.

While the remarks represent her most comprehensive comments on the supplemental capital issue to date, Matz did not provide many details. Credit unions would be able to sell subordinated debt to members, though Matz did not indicate whether non-members or organizations would be able to buy the debt, or how much debt a credit union could issue.

Allowing debt to count as capital might actually make credit unions' balance sheets more risky, said Julieann Thurlow, president and chief executive of $477 million-asset Reading Cooperative Bank. "High-cost debt is definitely not the way to go," she said.

"I find this proposal very surprising," Thurlow added. The NCUA "should not be encouraging risky behavior."

Rep. Peter King, R-N.Y., and Rep. Brad Sherman, D-Calif., introduced legislation in February amending the Credit Union Membership Access Act to count some forms of capital as net worth, but the bill is stalled in committee.

Credit union officials were quick to praise the supplemental capital plan.

"Supplemental capital has been a core issue for [the National Association of State Credit Union Supervisors] throughout much of its long history," Lucy Ito, the group's president and chief executive, said in a statement Friday. "We applaud the chairman for moving forward on action that will not only provide credit unions with needed regulatory relief, but also bolsters the safety and soundness of the entire credit union system."

Matz has called 2015 the year of regulatory relief for credit unions. In addition to the risk-based capital proposal and pending supplemental capital rule, NCUA is also planning to revamp field-of-membership regulations.

The NCUA earlier this month proposed a major overhaul of member business lending rules that would eliminate requirements that credit union borrowers personally guarantee loans, while adding a provision that imposes an 80% loan-to-value cap on collateral offered as security. The agency also expects to increase the amount of loans a credit union can make to a single borrower while lifting a cap on an institution's aggregate construction and development lending.