The biggest lesson we learned during the most recent financial crisis was that capital is king for financial institutions.
Credit unions stand out as the only U.S. depository institutions without the ability to issue some form of capital instruments to augment retained earnings to build capital. All other U.S. depository institutions, and most credit unions in other countries, are permitted various forms of alternate or supplemental capital. The severely limited statutory definition of credit union capital makes maintaining and building capital more challenging for credit unions than for other financial institutions.
While the credit union movement, as a whole, remains very well capitalized, some credit unions are close to or past the prompt corrective action (PCA) triggers as a result of the recession. As credit unions battered by the financial crisis recover in the coming years, rebuilding capital will be paramount. Without access to supplemental capital, and with earnings power facing headwinds, credit unions and their members will face a protracted period of reduced member service, disadvantageous member pricing, and slow growth.
Net interest income—essentially the difference between what credit unions earn in interest on loans and investments and what they pay in interest and dividends on savings—has been on a long-term downward trend caused by intense competition on both sides of the balance sheet. This pressure is unlikely to abate significantly going forward.
Not all credit unions have an immediate need for access to supplemental capital. Some might never need it. But many do now, and millions of members will suffer in the absence of this reform.
CUNA estimates 3,000 credit unions might have interest in access to supplemental capital. This includes credit unions with net worth below 9% of assets, and those with capital between 9% and 12% that have experienced a minimum two percentage point decline in their net worth ratio since year-end 2007. These credit unions serve 46 million members—nearly half of all credit union members.
Even credit unions that never use supplemental capital can benefit from increased protection for the share insurance fund as other credit unions build their capital. Supplemental capital will reinforce and strengthen the regulatory incentive for credit unions to remain exceptionally safe and sound, and will allow credit unions to do even more to serve their members.
Enactment of supplemental capital legislation would be a significant enhancement to the credit union charter. As a first step in the process of enacting this legislation, last month Representatives Peter King, R-N.Y., and Brad Sherman, D-Calif., introduced H.R. 3993, the Capital Access for Small Business and Jobs Act. This will start the conversation with Congress about the importance of enhancing credit union capital options.
Member business lending
Banks have reduced credit availability, while credit unions have continued to lend to small businesses throughout the financial crisis. To encourage banks to lend more to small businesses, Congress gave them $30 billion of tax-payer money, but banks claimed only $4 billion, and used $2.2 billion of that to repay Troubled Asset Relief Program obligations. But Congress still hasn’t enacted legislation to permit credit unions to lend more to their members for small-business purposes.
There’s no question that credit unions are more than willing to help small businesses. But the credit unions with the most business lending experience are approaching the arbitrary cap on credit union business lending. Their ability to serve new business borrowers is significantly reduced.
The cap also discourages credit unions that might like to start offering business loans from doing so. The costs of establishing and maintaining a safe and sound business lending program can outweigh the benefits of providing the service when the cap limits potential growth.
Legislation to increase the credit union member business lending cap from 12.25% of assets to 27.5% of assets has been introduced in both the Senate and the House, attracting a substantial number of co-sponsors in both chambers. Hearings occurred in the Senate Banking Committee and the House Financial Services Committee. The next step is to move the bills through committee and on to the floor, or to attach them to other legislation moving through Congress.
CUNA conservatively estimates credit unions would make an additional $13 billion in member business loans in the first year after lifting the cap and create 140,000 new jobs. It’s a no-brainer: a big economic boost with zero cost to taxpayers. Letting credit unions do more lending will put money into local communities and might give banks an incentive to do more lending themselves.
Community banks have been the only opponents to this legislation. They advocate for legislation that would reduce their regulatory requirements and permit them to put more capital toward small-business lending.
In 2011, we were successful in blocking the passage of some of their legislation, and we’ll continue to insist that their legislation not move forward until, and unless, the credit union member business lending legislation is advanced.
RYAN DONOVAN is CUNA’s senior vice president of legislative affairs. Contact him at 202-508-6750.