Credit Union Lobbyists Say Bankers' Interpretation of Alternative Capital Misses the Mark

WASHINGTON-While proponents of secondary capital for credit unions reluctantly admitted the report coming out of the Government Accountability Office on the subject was not a plus for their argument-but not the last word either-some bankers praised it for bringing to light the reality that credit unions should not have secondary capital. After the release of the GAO Study, “Credit Unions: Available Information Indicates No Compelling Need for Secondary Capital,” the Independent Community Bankers of America issued a press release “GAO: Tax-Free Credit Unions Shouldn’t Attempt to Sell `Stock’” that credit union advocates say clearly misses the boat. The association states that the report “concludes that the NCUA proposal would fundamentally jeopardize the member-owned, nonprofit nature of credit unions or create additional systemic risk for the industry.” ICBA President and CEO Camden Fine said in the release, “Credit unions constantly criticize community banks as stockholder-owned institutions. Meanwhile, this report shows they are willing to abandon their cooperative structure for a stockholder model to further grow their operations, while keeping the tax-exemptions that give them an unfair advantage over other financial institutions. `Growth-by any means necessary’ should be the motto of the credit union industry.” Fine added, “The credit union industry’s desire to permit additional forms of capital in the definition of net worth has been exposed for what it is-a blatant attempt to circumvent current law to promote unbridled expansion of the credit union industry. As ICBA has said for years, it is time for the mega-credit unions to focus on their statutory mission to serve people of modest means. If they want to be banks, they should apply for a bank charter and pay taxes.” “It appears as though the ICBA had many factual errors in mind when that release was prepared,” NAFCU General Counsel Bill Donovan pointed out. They say that NCUA is promoting a plan to allow credit unions to offer stock to their members and that reveals a fundamental misunderstanding of (a) where the momentum for alternative capital is coming from and (b) how alternative capital would operate as proposed. “Having said that, I would also point out, it’s not uncommon for representatives of the commercial banking industry to criticize proposals put forward by those in the credit union community without a thorough understanding of how those proposals would operate. We certainly have seen that in the past. Unfortunately, I believe we’ll see it in the future.” CUNA Vice President of Legislative Affairs and Senior Legislative Counsel Gary Kohn agreed, “I don’t know where they came up with that idea, that it’s going to permit credit unions to start selling stocks or something like that. That’s obviously a crazy misinterpretation on their part and I don’t know where they got that from but they’re all wet on that one.” In response to the credit unions trade officials accusations of inaccuracies, ICBA Director of Communications Tim Cook emphasized that the term stock in their release was in quotes, indicating a quasi-sense of the term. “The fundamental concern or principle still stands about where credit unions want to go,” he said, expressing concern about the impact on credit unions’ structure and membership if they were permitted secondary capital. However, Cook added, “We don’t have a formal policy position on secondary capital for credit unions,” and it is not working on one. He said the group did oppose the amendment on secondary capital for credit unions introduced, then withdrawn by Congressman Brad Sherman (D-Calif.) during debate on the Financial Services Regulatory Relief Act. American Bankers Association Senior Economist Keith Leggett said his organization did not issue their own release condemning credit unions’ use of secondary capital because the GAO report already did it. Leggett, who teaches corporate governance, added that the result did not surprise him because of the “impact on governance structure.” “If you limit capital strictly to members, it makes it difficult to attract that additional capital,” he explained. It would also be a nightmare education effort to ensure members understand what deposits are insured and which are not. If credit unions look to outside investors, the problem becomes who has the right to “call” the capital. If it were the institution that could scare off market interest or credit unions would have to pay a lot on the alternative capital deposits. Additionally, if alternative capital is issued, it could be defined as capital stock, which the Internal Revenue Service code says must be taxed, according to Leggett. “The secondary capital issue raises a whole host of questions that haven’t been adequately answered yet,” he concluded. Even with the risk-weighted capital option, “you still need to have a meaningful leverage ratio.” Right now, under the Credit Union Membership Access Act, the only statutory leverage ratio is 2% for undercapitalized credit unions. Banks must have 4% capital to qualify as adequate and 5% for well-capitalized status, plus they have a risk-based system based on tier 1 and tier 2 capital. America’s Community Bankers was not prepared to speak on the subject as of press time. The GAO study of secondary capital for credit unions is available at www.gao.gov/new.items/ d04849.pdf. “The outcome of the GAO report means the credit union capital conundrum will remain unsolved for a very long time thus making the Mutual Savings Bank option that much more critical,” CU Financial Services President Alan Theriault commented. He continued, “Credit unions which do not fit the historical credit union mold are caught in a political and philosophical quagmire because of the GAO report. The report indicated many of the biggest credit unions want to maintain the status quo, which, along with the GAO findings, mean all credit unions are likely to go without secondary capital for a long time.” This is going to make the mutual savings bank option “very attractive” to smaller credit unions, which do not have the earnings and capital building capabilities of larger credit unions. “NCUA’s recent efforts to stall conversions to the mutual bank charter and impose costly and punitive conversion rules is clear acknowledgment that capital and meaningful PCA relief is only a distant possibility,” Theriault said. “The ability to select a charter that best supports the mission of a financial institution is a critical right that should be preserved and is what Congress intended when it added streamlined conversion language to HR 1151.I hope credit union executives, especially those 15% that could be affected by mid-to near term issues related to capital and PCA, will act now to help remove NCUA from the conversion process so credit unions can be free to adopt the mutual savings bank charter if it is right for their institution.” [email protected]