ALEXANDRIA, Va. (3/29/16)--A new publication identifying benefits, best practices, regulatory requirements and common pitfalls of using secondary capital has been released by the National Credit Union Administration (NCUA). Secondary Capital Best Practices was developed by the agency’s Office of Small Credit Union Initiatives.
Secondary capital is available only to federally insured credit unions with a low-income designation. It allows these credit unions to build capital from external sources.
Without secondary capital, the growth rate of low-income credit unions is constrained by their ability to add capital only through retained earnings. If assets grow at a rate faster than capital grows internally, the credit union’s net worth ratio declines.
This constraint on the ability to add capital can also adversely affect a credit union’s expense ratio by making it more difficult to achieve economies of scale.
The NCUA’s guide is careful to point out that secondary capital is not a fix for credit unions experiencing financial or operational problems. While it can increase the cushion for growth, it cannot supplant the due diligence and planning necessary for a credit union to grow in a safe and sound matter.
According to the NCUA, these are the best uses of secondary capital:
Common misuses include: