Supplemental Capital Measure Was Years in Coming

CU Timers - By Claude R. Marx - February 9, 2012

The patience and endurance finally paid off.

The three big credit union trade associations have been working for years to find a way to allow supplemental capital for non-low income credit unions. And they are praising Thursday’s introduction of a bill by Reps. Peter King (R-N.Y.) and Brad Sherman (D-Calif.) as a significant step toward achieving their goal.

"For NASCUS and state regulators, access to supplemental capital for credit unions has always been a matter of safety and soundness. This critical reform gives credit unions the necessary capital flexibility to respond to economic conditions, both in good times and bad,’’ NASCUS President/CEO Mary Martha Fortney said in a statement.

CUNA President/CEO Bill Cheney wrote lawmakers that the measure “would provide credit unions with appropriate ability to raise capital from sources other than retained earnings without putting in jeopardy the ‘one member, one vote’ principle that is the bedrock of the credit union ownership structure.’’

NAFCU President/CEO Fred Becker wrote lawmakers that allowing supplemental capital would “further minimize the probability of credit union insolvency, ensure they continue to serve the nearly 94 million Americans who rely on credit unions as a vital source of financial services, and allow them to grow to meet the needs of members.’’

In the past, CUNA has expressed concern that the NCUA would place too many regulatory constraints on credit unions that want to seek secondary capital. NAFCU expressed concern about letting supplemental capital from outside the credit union system.

In April 2010, a report by an NCUA task force chaired by Board Member Gigi Hyland said any capital must adhere to three principles: preservation of the cooperative credit union model, robust investor safeguards and increased prudential safety and soundness safeguards.

The report noted that the agency's supervisory experience with the 41 low-income credit unions (out of 1,102) that receive secondary capital has been "mixed." It criticized some of those credit unions for poor due diligence and "premature and excessively ambitious concentrations of uninsured secondary capital to support unproven or poorly performing programs."

CU Financial Services Editors Note: A 1998 Federal law (H.R.-1151) provided credit unions a path to raising capital by first converting to a mutual savings bank, In another section the legislation imposed new capital requirements and business lending restrictions on credit unions. Congress, therefore, reasoned that by allowing a conversion to a mutual savings bank a credit union could excape these restraints, raise capital and expand business lending programs and position itself in a way to better serve its community.