Time For Supplemental Capital

What are we waiting for? Why not? Now is the time! NASCUS hears these questions and comments often when discussing the topic of supplemental capital for credit unions. From a safety and soundness perspective, NASCUS and state regulators are convinced that there is no reason to delay the legislative and regulatory changes to institute supplemental capital for all credit unions.

Although the majority of credit unions are well-capitalized, the credit union system needs capital and it needs capital now. While credit unions have managed to perform generally well during this tough economic time, it has not been without continuous challenges. And with balance sheets in the red, negative earnings and insurance fund assistance to the corporates, the evidence is clear that supplemental capital would benefit the credit union system.

For nearly 10 years, NASCUS and state regulators have encouraged Congress and the National Credit Union Administration (NCUA) to allow supplemental capital for all credit unions. A few years ago, the topic garnered mixed reviews and little consensus existed in the system. However, with dramatic developments in the financial sector during the last year, consensus is building for supplemental capital options for credit unions. Complex economic burdens have reinforced the position of NASCUS and others that there is a significant need for alternative means to maintain or to raise capital.

An Essential Tool

NCUA Board Member Gigi Hyland announced this past December that she is accelerating discussions about supplemental capital, having heard convincing arguments by NASCUS and state regulators about the importance of capital reform. NASCUS has continuously stated that supplemental capital for credit unions is first and foremost a matter of safety and soundness for the credit union system. In turbulent times, credit unions must have the necessary tools to protect and enhance liquidity for now - and into the future. Supplemental capital is one of those essential tools needed urgently by credit unions.

A change to the definition of net worth in the Federal Credit Union Act is necessary for credit unions to count more than just retained earnings in their net worth. After the law is amended, state and federal regulators would promulgate appropriate regulations to implement supplemental capital. Fortunately, regulators will not have to start from scratch on the models and regulations. Both low-income and corporate credit unions currently use supplemental capital and NASCUS authored a white paper with three capital models as a springboard for discussion. NASCUS is confident that the supplemental capital models can be refined in a manner that adheres to four principles: 1) protection of safety and soundness; 2) preservation of the credit union cooperative ownership; 3) maintenance of the federal credit union tax exempt status; and 4) commitment to full disclosure for members.

A Reasonable Solution

As we know, Congress has a full agenda in the coming weeks and months; it will be diligently working on a major overhaul of the current regulatory system, among other important matters. NASCUS will continue its efforts to persuade Congress to include credit union capital reform in its legislative agenda. Allowing supplemental capital for credit unions is reasonable and a beneficial solution that we can achieve to enhance credit union safety and soundness. Further, supplemental capital would act as a buffer to the National Credit Union Share Insurance Fund (NCUSIF), thereby adding an extra layer of protection to maintain credit unions' long independence from the federal government and taxpayer assistance.

NASCUS urges the entire credit union system to join us in encouraging Congress, the U.S. Treasury and others to take action immediately to make supplemental capital an option for all credit unions. We need to take every feasible step to enhance safety and soundness, to protect the insurance fund and to bolster liquidity in these challenging times. NASCUS encourages you to join us in advancing the important dialogue on this issue. Let's give credit unions the capital options they need to continue and to enhance their important role in the American financial services system.

Mary Martha Fortney is president/CEO of NASCUS and can be reached at marymartha@nascus.org. Read more about NASCUS' supplemental capital efforts at www.nascus.org.