Adding Supplemental Capital To the Credit Union Toolbox

We need additional tools that allow credit unions to get the capital they need to continue providing members services, to open branches and accept deposits, and which ensure that those who stand to make share-deposits have an additional layer of protection between themselves and that insurance. Capital is what stands between some disaster, bad management, or bad luck affecting one credit union, and the insurance fund being hit. And, when the insurance fund is hit, it adversely effects all members of all credit unions because one way or another that is going to effect premiums. In fact, it’s hard to make an argument against depository institutions having more capital. I don’t know anyone who says, “Financial institutions should be deprived of a tool to be capitalized.” But for credit unions, supplemental capital tools are allowed only to low-income credit unions. What we decide is capital for one type of credit union, ought to be capital for all credit unions. Some initial questions that arise are: who should be allowed to invest? And, more importantly, what would be the rights and privileges of these investors? It is absolutely critical that we maintain the one-member-one-vote democratic principle in the credit union movement: supplemental capital is not an attempt to create shareholders with shareholder votes. One place to look for supplemental capital is within the membership of the credit union, offering to sell them subordinated debt. That has a risk. Are credit union members sophisticated enough to understand the difference between subordinated investment and insured certificate of deposit? What steps should be required to make sure each investor is aware that subordinated debt is uninsured? Another source for supplemental capital might be other credit unions. There, it would have to count against the buyer-credit union’s capital. In other words, it would be a fully reserved asset. We want to avoid a pyramid scheme where one credit union has subordinated capital from another credit union, but both are counting the capital as an asset on their balance sheet. The credit union movement could then have no capital at all. So, if additional capital comes from other credit unions, it has to count as capital for the receiving credit union, not the loaning institution. The final issue involves outside investors. There is already an established market for subordinated debt issued by financial institutions, and credit unions deserve a chance to tap into it. Those who buy subordinated debt in the for-profit sector have no vote in or control over the financial institution that issues the debt. There is a market that already expects to be regarded as a subordinated debt-holder and not a shareholder with a vote. We need to make sure that subordinated capital is permanent. We want to avoid a circumstance in which 30 days elapse and the credit union loses its capital. Rather, supplemental capital should be a long term investment and staggered so that no more than 5%-10% becomes due in any calendar year. Obviously, supplemental capital should count as capital when determining the amount of capital the credit union has for the purposes of prompt corrective action. Over the last two years, Congressman Bob Ney (R-Ohio) and I have taken the lead in advocating for another tool to generate capital. In July, I introduced an amendment to the Financial Services Regulatory Relief Act which would have provided for credit union supplemental capital. Rather than push the amendment to a vote, I secured an agreement with Chairman Oxley and Ranking Member Frank in asking the General Accounting Office (GAO) and the National Credit Union Administration to study supplemental capital. The NCUA’s response is back. It identifies some of the issues: who are the permissible investors, what is the maturity of the accounts and, of course, the fact that if you are going to have an outside investor you should probably have audited financial statements. It also points out that this would also be part of a risk-based capital model to correctly define the amount of capital needed in an sophisticated way and then use supplemental capital to get additional capital. Recently, my staff met with GAO officials who said the design of their study would be completed in early March. I hope that by the end of May, they will have it complete and we can move forward in securing additional capital tools for all credit unions.