Mutuals say latest stimulus effort highlights need for capital reform

The mutual banking industry is ready to make another push to reform how they raise capital.

Advocates are finding new motivation after banking regulators published an interim final rule for the Emergency Capital Investment Program on Monday. The program provides up to $9 billion of low-cost capital that community development financial institutions and minority depository institutions can use to make loans in low-income and underserved communities.

But the program's structure is disadvantageous for the handful of mutuals that qualify to participate. That's because depositor-owned mutuals can only issue subordinated debt, which the interim final rule counts as Tier 2 capital. Thus, any mutual that uses ECIP funds to make loans would face a hit to Tier 1 capital.

The rule “effectively denies participation in the program to mutual banks,” said Douglas Faucette, director of America’s Mutual Banks.

The trade group plans to submit a comment letter on the rule that would highlight the challenges mutuals face when it comes to raising Tier 1 capital. For now, the only way they can really boost that core capital ratio is with retained earnings. It is a big reason why so many mutuals have converted to stock-owned companies in recent years.

The number of mutuals has been declining for decades, falling from nearly 2,500 in the mid-1980s to about 470 today, according to the Federal Deposit Insurance Corp. Eastern Bancorp, which had been the nation’s oldest and largest mutual, converted to stock ownership in October.

“We question why the agencies are leaving mutuals out of this important program,” said David Barksdale, CEO of the $918 million-asset Piedmont Federal Savings Bank in Winston-Salem, N.C., a depositor-owned institution.

“Community-based, mutual-form institutions are a historically vital part of the fabric of many communities,” Barksdale added. “Their future viability must be protected and enhanced.”

Stock-owned banks can issue preferred stock, which counts as Tier 1 capital, to join the ECIP. While credit unions, like mutuals, cannot sell preferred stock, they are able to ask the National Credit Union Administration to let them count any subordinated debt issued as net worth, which is analogous to Tier 1 capital at banks.

Regulators have made exceptions for subordinated debt in the past. During the 2008 financial crisis, mutuals that issued subordinated debt under the Troubled Asset Relief Program were allowed to count the funds as Tier 1 capital.

There has been no indication that such an exception is planned for ECIP.

OCC spokesman Bryan Hubbard said the agency is committed to the tough capital standards — including how it applies subordinated debt to capital ratios — reaffirmed by the 2013 Basel Capital Rule. At the same time, he said the OCC "values the federal mutual savings association charter as an important component of the community bank population" and would continue to work with depositor-owned banks to support the mutual charter.

The ECIP issue creates an opportunity for mutuals to again push for changes to capital rules, Faucette said.

A legislative fix would likely be needed.

Bankers unsuccessfully lobbied Congress in 2014 to let mutuals raise money through a capital certificate, which would have been similar to preferred stock and would have counted as Tier 1 common equity.

For now, mutual advocates are hoping to use the ECIP issue to raise awareness.

“This is yet another example of either a complete misunderstanding of the fundamental legal structure of mutuals, or a stubbornness to hold the line on the treatment of sub debt,” Faucette said.