WASHINGTON — NCUA's testimony before the House Financial Services Committee earlier this week has some within the credit union community saying the regulator may have opened the door a little wider for federally insured CUs to gain access to supplemental capital.
But others reacting to comments by NCUA General Counsel Michael McKenna — who said the agency could consider allowing credit unions greater access to supplemental capital as it finalizes its proposed risk-based capital rule — see things differently.
They view McKenna's remarks as doing little to improve all federally insured credit unions' chances to gain supplemental capital access, particularly since a legislative change to the statutory framework for credit union capital would be needed for CUs to accept tier 1 capital and impact net worth. (Low-income designated credit unions already have access to supplemental capital.)
CUNA, along with many industry executives and analysts say CUs need access to secondary capital to make the NCUA's proposed risk-based rule work. They cite CUs' inability to raise capital quickly as a serious concern for the future of many credit unions under NCUA's new rule.
CUNA Deputy General Counsel Mary Dunn said the main benefit to credit unions from McKenna's testimony is that CUs' supplemental capital needs are now clearly in front of lawmakers.
"This is important, because the agency, in a very important Congressional forum, indicated they are considering how supplemental capital could be part of this risk-based capital proposal, and that is a big step," said Dunn.
Mike Coleman, NAFCU director of regulatory affairs, said, "NCUA has now stated publicly they are hearing the concerns of the industry and that lawmakers are interested in this proposal."
Paying Attention To Comments?
Industry insiders say McKenna's remarks also indicate NCUA is paying close attention to credit union comments on the proposed rule, a sign that the final rule will likely be adjusted.
Louis Jimenez, CEO at Montauk CU in New York, said any discussion on supplemental capital is "positive. This may indicate NCUA is listening to CU comments, and comments from the various trade groups that have been diligent and rather clear with their views."
Montauk could be hit hard by the new capital rule if changes are not made.
Under the proposal, the 11.94% net worth CU drops to 6.79% on the risk-based calculation, well below the proposed 10.5% well-capitalized floor. Jimenz told Credit Union Journal in a previous report that Montauk may consider changing to a mutual savings bank charter if the proposed rule is not adjusted.
The proposal applies heavy risk weighting to member business loans — 100% below 15% of the loan portfolio, 150% from 15% to 25% and 200% for any higher concentration. MBL makes up 95% of the $147 million Montauk's loan portfolio. The CU has been successful making taxi medallion loans, whose balances average about $200,000 each.
McKenna, on Wednesday, clarified to Congress the agency's position on supplemental capital, sending a letter to Financial Services Committee Chairman Jeb Hensarling (R-Texas) and Ranking Member Maxine Waters (D-Calif.). McKenna explained that the NCUA "currently has very limited statutory authority to establish supplemental capital that would benefit" federally insured CUs.
McKenna wrote that except for LICUs, "Congress limited the definition of 'net worth' in the Federal Credit Union Act to retained earnings... Therefore, unless Congress amends the statutory definition of 'net worth,' other forms of capital, including supplemental capital, cannot legally be counted as 'net worth' for federally insured, consumer credit unions, other than those with a low-income designation."
McKenna also pointed out the proposed rule does address use of supplemental capital by LICUs for calculating the risk-based capital ratio.
CUNA, however, has a different interpretation of the credit union capital statute. The trade group maintains that supplemental capital could be used for risk-based capital purposes under a regulatory proposal without legislative changes.
In a previous report, CUNA Chief Economist Bill Hampel stated that as NCUA re-examines the new rule during the comment period, it's possible the agency could open the door for supplemental capital.
"There is nothing stopping NCUA from saying that another factor in the numerator for the risk-based capital ratio could be some form supplemental capital," Hampel noted. "This may be a way to get access to supplemental capital just for the risk-based portion of the capital requirement. However, it will not solve the problem of still having a 7% leverage requirement without access to supplemental capital."
Dunn reiterated that the benefits from McKenna's remarks now, in front of Congress, raise the profile of the capital issue facing credit unions under the proposed rule.
In his letter to the Financial Services Committee on Wednesday, McKenna also stated that the agency supports H.R. 719, the Capital Access for Small Business and Jobs Act, which would permit the agency to authorize supplemental capital for "healthy, well-managed credit unions."
Comments Just Rhetoric?
Todd Fanning, SVP and CFO at the $2.1 billion-asset University of Iowa Community CU, in Iowa City, said he views McKenna's comments as rhetoric.
"My first take is NCUA may be trying to 'soften the blow' by using rhetoric to allow credit union access to supplemental capital, particularly in light of the fact they have never been a proponent of it thus far," said Fanning about McKenna's testimony on Tuesday. "It certainly does not change my initial perspective on the rule, which should most importantly take into consideration an institution's profitability and experience in navigating their balance sheet. While I am certain NCUA is getting pressure from the credit union comments they are receiving, in the end I don't believe they are serious regarding allowing supplemental capital."
Peter Duffy, a managing director at Sandler O'Neill in New York, holds a similar opinion. "I have not heard anything from NCUA on supplemental capital. I get asked to discuss this frequently by large credit unions who want to continue growing, but [CUs accessing supplemental capital] would seem to be a long road with both an unclear and perhaps and unlikely outcome."
NAFCU's Coleman said that any efforts by NCUA to address supplemental capital in the final rule would be positive.
"We think all credit unions should have access to supplemental capital, and NAFCU supports a legislative solution if that's what it takes," said Coleman. "That said, even if CUs are authorized to obtain supplemental capital it does not mean they will actually be able to go out and easily get it. And, supplemental capital is not a cure-all for the major problems of the proposed rule, like the risk weightings."