Credit union lobbying in Washington has survived for a while playing defense against issues like cram-downs and creating a minimum threshold for CFPB coverage but lost their latest defense against the debit interchange cap.

The Government Accountability Office studied PCA's effects on credit unions in 2004, but only looked at times of relative economic strength (2000-2003), University of Maryland Professor Clifford Rossi noted. His study, “Implications of Prompt Corrective Action for the U.S. Credit Union Industry,” which he said was not requested by anyone, demonstrated what he termed as the PCA trap.

Now that the economy has fallen and dragged on as it has the last few years, he ran simulations that clearly showed the harmful effects credit union PCA as it stands in an economic downturn that he termed the PCA trap. The sample $100 million credit union growing at 5% (average between 1997 and 2007) grew net worth in dollars and as a percent during a stable economic environment. During an aggressive growth year, assets outpaced net worth and dropped the credit union's capital ratio. In a stressful economic environment, this credit union's net worth ratio takes a nose dive. The same credit union in that same poor environment but with supplemental capital experienced a drop off but nowhere near the degree of the credit union without supplemental capital.

Rossi concluded that the results without capital reform tied credit union executives' hands, causing them to tighten or increase the cost of credit at exactly the time their members and potential members needed them most.

What will be the next truly galvanizing issue for credit unions? One CEO suggested to me that credit unions needed an enemy other than their own members in these battles–a hideous beast to demonize as they did with banks in H.R. 1151. Capital reform could be that issue. Without it, whether limited supplemental or risk-based, otherwise healthy credit unions could find themselves in hot water. Then if supplemental capital is granted for credit union members only, interest levels would have to be high enough to make it worthwhile. Paying a high enough return for the risk involved also comes into question.

Consolidation is another answer for credit unions in PCA trouble. Or these credit unions could jump charters to one with greater capital flexibility, not only to manage regulatory issues but to just plain grow and survive. You might recall an Aite group study from 2008 that found 33% of credit unions surveyed (all over $100 million in assets) planned to convert to bank charters. Obviously that has not come to fruition at this point but it doesn't mean they don't have a plan. Is mass charter conversion the impetus for capital reform? The necessary demon?