Next Up on the Regulatory Hit List: Supplemental Capital
An article in this morning’s American Banker (subscription required) correctly surmises that supplemental capital is likely to quickly follow RBC reform. Sure enough, I reviewed the statements of Board Members Metsgar and McWatters – which are only slightly shorter than the regulations they spoke of – and the Board uniformly agrees that supplemental capital can be used, but only to satisfy the capital requirements for credit unions subject to the new RBC regime. Chairwoman Matz also supports supplemental capital, but was able to express her support in a mercifully more concise manner.
The Board’s stance raises additional questions about what form will this supplemental capital take and NCUA’s precise legal authority. In its 2010 White Paper on supplemental capital reform, the NCUA identified three potential types of supplemental capital – voluntary patronage capital; mandatory membership capital and subordinated debt. Voluntary capital would be similar to the capital that low-income credit unions currently take in from organizations willing to provide them with capital. Mandatory membership capital would make the purchase of supplemental capital a condition of credit union membership.
This is pure speculation on my part, but I believe the most likely form of supplemental capital that NCUA is likely to authorize is subordinated debt. This debt would be subordinate to claims of the national Share Insurance Fund and, as envisioned by the White Paper, would be used to cover losses that exceed all other types of capital. Outside investors would purchase this debt which would be tied to minimum redemption periods.
Whichever type of supplemental capital NCUA authorizes, it will be subject to the scrutiny of the banking industry and its lawyers. While I believe NCUA is on solid ground, it does not have explicit authority to approve supplemental capital except for low-income credit unions. As explained by Board member McWatters, the Board believes it can authorize supplemental capital for complex credit unions provided that in doing so it is taking into account the material risks faced by credit unions.