The Time Is Now for Capital Reform

CUs need it, regulators support it, and legislation has been introduced.

April 22, 2013

When we speak of “capital reform,” we mean access to supplemental capital and other things such as preserving and enhancing regulatory flexibility.

Bank regulators have the flexibility to set bank capital standards, but NCUA does not have that flexibility. We need to change that.
“Why,” some ask, “is capital reform so important?” After all, credit unions’ aggregate net worth ratio is 10.4%—nearly 3.5 percentage points higher than the prompt corrective action (PCA) definition of “well capitalized,” which is 7%. So what’s the big deal?
There are a number of reasons all credit unions should seek capital reform. First and foremost, it makes the credit union charter more flexible. It allows credit unions to better serve members in a variety of challenging economic and operating environments, and it helps credit unions build capital more quickly with fewer negative effects on service.
Also, credit unions want capital reform. Overall, 84% of credit union CEOs responding to CUNA’s 2013 Credit Union Political Action Survey agree with this statement: “Credit unions need flexibility to raise alternative/supplemental capital.”
While there isn’t complete agreement on the type of alternative capital credit unions should have access to, more than half of those who see the need for supplemental capital say credit unions need the flexibility to raise it from any source. Plus, the need for capital reform has grown. Consider that:
  • At the beginning of the Great Recession in 2007, credit union net worth stood at 11.5%—but it dipped to 9.9% by year-end 2009. Although capital levels have bounced back, current levels remain more than one point lower than prerecession levels.
  • At year-end 2007, 90% of credit unions were “very well” capitalized (CUNA’s term), with PCA net worth of 9% or greater (i.e., 7% “well” plus a two percentage point buffer). Today, only 75% of credit unions are “very well” capitalized.
  • In 2007, the 11.5% credit union aggregate net worth ratio was more than one percentage point higher than the banking industry’s equity capital ratio. Today, it’s one percentage point lower.
As of year-end 2012, 4% of credit unions (about 300) had less than 7% net worth, 21% (nearly 1,500) had between 7% and 9% net worth, and 16% (1,100 credit unions) had between 9% and 12% net worth— but they’ve seen their ratio decline by at least two percentage points since the start of the crisis.
Therefore, nearly 3,000 credit unions—40% of the movement’s total—might be interested in capital reform today.
But all credit unions should be interested and supportive: Even though many credit unions are content with their current capital levels, they might need access to alternative capital in the future due to financial challenges, fast growth, or other operational challenges.
Regulators, both state and federal, also are supportive. NCUA Chairman Debbie Matz is on record in congressional testimony supporting the need for well-capitalized credit unions to raise capital.
Matz has noted the “chilling effect” on the willingness of some healthy credit unions to accept new deposits and the fact that members of modest means oft en can’t fully leverage the credit union services they need most. She acknowledged the acute need for a legislative remedy for credit unions that have shown share growth caused a decline in net worth.
Fortunately, Congress might be ready to act. Specifically HR 719—the Capital Access for Small Businesses and Jobs Act—was introduced in the House by Rep. Peter King (R-N.Y.) in February. The bill already has 14 co-sponsors, including Reps. Brad Sherman (D-Calif.) and Mike Michaud (D-Maine).
This legislation would not alter the cooperative ownership structure (or tax status) of credit unions, and the capital raised would be uninsured and subordinate to other claims against the credit union.
Credit unions want—and need—capital reform. Regulators support it. Legislation has been introduced. The time is now. We can’t get this done without your active engagement.
MIKE SCHENK is CUNA’s vice president of economics and statistics. Contact him at 608-231-4228.