By Mary Martha Fortney
Alternative capital has been a heated topic in recent years in the credit union community. The findings of a study by the U.S. Government Accountability Office did not come as a surprise to some when it was released in 2004. Of course, many state regulators and credit unions wish the report would not have concluded that there was no compelling need to give credit unions access to alternative capital.
State regulators and forward-thinking credit unions believe there is a compelling need for alternative capital. State regulators and credit unions both believe that access to alternative capital is important to the future of credit unions. It both strengthens a credit union’s capital base and enables credit unions to continue meeting the financial needs of members.
The 2004 GAO report prompted the National Association of State Credit Union Supervisors to form an Alternative Capital Task Force to study the issue of alternative capital for credit unions. The Task Force collaborated on a white paper with regulators and credit union executives who have experience in creating and using alternative capital. The 2005 white paper, “Alternative Capital for Credit Unions … Why Not?” presents three alternative capital models for credit unions to study.
The credit union community has debated for several years whether credit unions can and should offer capital instruments. Most critics cite their concern that such capital instruments, especially if issued to non-members, would nullify the tax-exempt status of credit unions. However, as demonstrated in the white paper, there are alternative capital options that preserve credit unions' not-for-profit status.
To further study the issue, NASCUS recently formed an alternative capital subcommittee of its Legislative and Regulatory Affairs Committee. The subcommittee plans to continue financial education on this issue and will further discuss the white paper in the credit union community.
When discussing alternative capital, it is also important to emphasize its potential role in providing regulatory relief to credit unions. NASCUS regulators have indicated that credit unions are bound by the limited definition of net worth in the Federal Credit Union Act, allowing only retained earnings. This limited definition restricts growth. Credit union CEOs in NASCUS’ membership have echoed the regulators saying it would be beneficial to access alternative capital to expand their net worth in order to serve members. Beyond this, state regulators and credit unions understand that even with the lower leverage ratio and risk-based capital as proposed in H.R. 2317, the Credit Union Regulatory Improvements Act (CURIA), some state-chartered credit unions may not be able to rely solely on retained earnings to meet the capital base required by PCA standards.
Credit unions are the only federally insured depository institutions that do not have access to risk-based capital to build and monitor credit levels. Risk-based capital enables financial institutions to measure capital adequacy and to avoid additional risk on their balance sheets. This system recognizes that a one-size-fits-all capital system does not work. NASCUS has a long-standing policy supporting risk-based capital.
Also, remember, Basel I was introduced more than 20 years ago and achieved success in its ability to strengthen the soundness and stability of the international banking system. Other financial institutions are restructuring Basel I, a successful risk-based capital regimen. But credit unions have never been permitted to use risk-based capital.
The success of Basel I led to the development of Basel II, now in its introductory stages. The Basel programs have demonstrated that risk-based capital is beneficial for financial institutions. Congress recently asked the GAO to further study the Basel programs.
Alternative capital continues to be an important topic for NASCUS regulators and credit union members. As such, alternative capital for credit unions will continue to be a NASCUS priority in the coming year. The white paper has been distributed to the credit union community and to members of Congress. We look forward to continuing discussion on this topic and making alternative capital a reality for credit unions. After viewing the white paper, please add your comments to this post.
Mary Martha Fortney is president/CEO of NASCUS, the National Association of State Credit Union Supervisors. NASCUS’ mission is to enhance state credit union supervision and advocate for a safe and sound credit union system. Visit NASCUS at www.nascus.org.
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