Alternative Forms of Capital Come Front and Center as Lawmakers Request Info from NCUA

WASHINGTON-High-ranking Financial Services Committee members recently wrote NCUA Chairman Dennis Dollar for his opinion on alternative forms of capital for credit unions and their inclusion in the definition of “net worth.” “For the last couple of years, many in the credit union industry have been seeking legislative changes allowing federally insured credit unions to have additional forms of capital to be included within the definition of `net worth,’ ” the letter signed by House Financial Services Chairman Mike Oxley (R-Ohio), Ranking Member Barney Frank (D-Mass.), and committee member Brad Sherman (D-Calif.) read. With the current high levels of liquidity at credit unions, their net worth ratios have been dropping, bringing some credit unions under prompt corrective action rules despite appropriate management. The legislators asked Dollar: 1) From 1992 to 2002, at what rate did credit unions increase their capital (net worth) both in actual dollars and as a percentage of assets (net worth ratios)? 2) Has that rate of growth differed during times of strong economic growth and times of weak economic growth? 3) In the last three years, what has been the relationship between the decline in the stock market and the growth of credit union shares (deposits) and net worth? 4) Has the Agency performed any studies or internal reports on capital for credit unions? If so, can you please forward them to us? 5) What has been the Agency’s experience with credit unions that have obtained supplemental capital (either low-income credit unions or credit unions in a net worth restoration plan)? 6) What has been the Agency’s experience with corporate credit unions that have obtained supplemental capital from natural person credit unions? In that experience, has the supplemental capital been beneficial to the operations of corporate credit unions in terms of expanding services or protection against losses? 7) In approving forms of supplemental capital for low-income and corporate credit unions, did the Agency look at different vehicles for obtaining the capital? If so, which forms did the Agency review and why were they rejected? 8) To your knowledge has a lack of capital caused any credit union not to participate in the “ Access Across America” initiative bringing affordable financial services to low-income and underserved communities? The lawmakers gave Dollar until Sept. 2 to respond. Dollar floated his idea for risk-based PCA on Capitol Hill during testimony on regulatory relief legislation before the House Financial Institutions and Consumer Credit Subcommittee in March. He first brought up the concept at CUNA’s 2003 Governmental Affairs Conference in February. Credit union lobbyists have said they view the request as a positive sign. “I think there is a general recognition that credit unions are in a tough position vis–vis their ability to raise capital the way banks can,” CUNA Vice President and Senior Legislative Counsel Gary Kohn commented. He added that CUNA is looking at a variety of patches for credit unions’ PCA woes, including some form of risk-based capital or actually lowing the capital levels in PCA itself. “The letter is a clear indication of the committee’s recognition of how credit unions are being increasingly challenged to manage their unprecedented growth while remaining within the constraints of PCA,” NAFCU President and CEO Fred Becker stated. “We believe the chairman, ranking member and Congressman Sherman have asked important questions, the answers to which we believe will help further frame the solution to this issue. Our goal from the start has been to find a workable solution to the PCA capital constraints for which NCUA Chairman Dennis Dollar has suggested the careful examination of a risk-based approach.” Kohn explained that when Sherman was unable help credit unions out with an amendment in the regulatory relief legislation to fix the problem, he still wanted to aid in focusing attention on the issue. [email protected]