Parents often give the age-old advice to their children: Just because you can do something doesn’t mean you should.
Unfortunately, the same adage applies to the National Credit Union
If the NCUA finalizes this rule,
Credit unions are supposed to serve consumers of small means; its members (customers) are supposed to control the institution; and profits are supposed to be delivered back to the members in the form of better rates and dividends. This is the basic formula for the industry to receive its blanket tax exemption.
Unfortunately, that structure and mission will be subverted under this proposal, if finalized.
Subordinated debt is a relatively expensive form of capital, and investors rightfully will demand a return. The NCUA’s proposal creates incentives for credit unions to focus on products that generate the highest yields, which will result in catering to those of greater means.
Credit union management will answer the phone when their investors call, given they hold capital critical to the institution’s tax-advantaged growth. This gives investors greater influence over the direction of the institution than the average credit union customer, perhaps even more than the individual directors.
This change is also being made without a demonstrated need, but with plenty of proven risk. Large credit unions have pushed for this change for years.
However, it remains unclear why they — or the NCUA — believe it is necessary. An overwhelming majority of credit unions reportedly claim to be well capitalized.
Yet credit unions that have issued this type of debt in the past have subsequently grown too rapidly, failing at a
While the NCUA has acknowledged those concerns, they’ve gone out of their way to avoid addressing it. The proposed rule places no limits on how the new capital can be used. And the rule does not place meaningful limits on how much money could be raised.
As currently proposed, by issuing subordinated debt, credit unions unlock regulatory room to issue additional subordinated debt, making the effective borrowing authority limited solely by investor demand. If that’s not risky business, we are not sure what is.
This is just another example of the industry’s behemoths demanding all the benefits of being banks, except for the biggest thing that distinguishes them from banks: not paying their fair share in taxes.
Large credit unions are acting more and more like banks every day. And yet, they use the shield of their not-for-profit status to avoid everything from paying taxes to complying with the Community Reinvestment Act.
Nothing in this proposal dictates that these new funds will be directed to serving people of modest means. This again demonstrates how the NCUA is out of touch with the historical origins and very purpose of why credit unions were created.
The NCUA should not push this massive and inappropriate regulatory change through in the last weeks of the Trump administration. It creates systemic risk for no reason other than to fuel the uncontrolled growth of large credit unions, mostly at the expense of smaller credit unions. That’s simply a bad idea in these already unsettled economic times.
