Is Supplemental Capital worth the risk?

In yesterday’s blog, I provided an overview of NCUA’s Supplemental Capital ANPR addressing a potential Supplemental Capital framework. I know requests for feedback are white noise to many of you, who actually have more immediate concerns to worry about, like running a credit union. But there are some big issues tied in with this proposal that affect the industry as a whole and you should take the time to weigh in.

Just how big are the issues? Well, this is the first ANPR I have ever seen that raises the prospect of credit unions putting their tax exempt status at risk. The ANPR notes that “With respect to federal credit unions, the Board is aware that part of the basis for the credit union tax exemption was that Congress recognized most credit unions could not access the capital markets to raise Capital.” It further points out in a footnote that Mutual Savings Banks and Savings and Loan Associations were stripped of their tax exempt status in part because they “had evolved from mutual organizations to ones that operated in a similar matter to banks.”

To me, the core issue is how much credit unions with $100 million or more in assets need Supplemental Capital both to comply with their enhanced risk based capital obligations and continue to grow to meet member needs. The simple truth is that the Basel iii  framework, for which NCUA’s Risk Based Capital was the inspiration, was designed with large banks in mind. These institutions can satisfy capital requirements by issuing stock. Credit Unions have no such option. Supplemental Capital would give them greater flexibility to meet these new demands.

And let’s not forget that the credit unions that are most likely to directly benefit from Supplemental Capital are the same ones large enough to bring down the entire industry. Supplemental Capital could provide an added buffer against future financial meltdowns.

Ultimately, I believe that the industry needs to have Broad Based Supplemental Capital as an option available for all credit unions that choose to use it. But seeing legislation like this pass any time soon is about as likely as seeing President Trump’s spokesman, Sean Spicer leading the Washington Press Corp. in a yoga class. (That man really has to take a chill pill.) Supplemental Capital regulations could show Congress how additional capital flexibility helps credit unions grow to meet member needs and enhances the safety and soundness of the industry.

On that note, Namaste