Credit unions ask for rule change on supplemental capital

March 25, 2012

A coalition of credit unions is calling on Congress to amend a regulation they say penalizes healthy financial cooperatives for attracting new share deposits.

Credit unions must maintain a net worth ratio — retained earnings as a percentage of total assets — of at least 7 percent to be considered “well capitalized.” Accepting new share deposits without simultaneously growing retained earnings could throw off that ratio, and trigger a slew of restrictions.

That is why representatives from some 4,000 credit unions are asking for financial cooperatives to be allowed to issue additional forms of capital to supplement their retained earnings.

The issue was one of several regulatory complaints, including lifting the cap on member business lending, discussed last week at the Credit Union National Association’s Governmental Affairs Conference in the District.

As it stands, credit unions, except for those designated as corporate or low income, are restricted to using retained earnings to increase capital. If supplemental capital were allowed to count toward a credit union’s net worth, advocates say it would help credit unions serve the needs of their members.

Linthicum-based State Employees Credit Union of Maryland, with $2.2 billion in assets and a net worth ratio of 9.6 percent, has been able “to grow reasonably and maintain a very strong capital rating,” said chief executive Rod Staatz. But he is concerned that down the road as the credit union grows, it “could actually have to throttle growth.”

Early last month, credit unions scored a win when Reps. Peter King (R-N.Y.) and Brad Sherman (D-Calif.) introduced legislation authorizing the National Credit Union Administration to allow credit unions in good standing to accept supplemental capital.

The bill, which has been referred to the House Financial Services Committee, says the supplemental capital would be subordinate to all other claims against credit unions.

Opponents of the legislation say it disrupts a regulatory protection in place to slow rapid growth and excessive risk taking. What’s more, by accepting supplemental capital credit unions are straying beyond their tax exempt mission, argues Paul Merski, chief economist at the Independent Community Bankers Association.

“Credit unions have been given a generous tax exemption with a statutory mission of helping people of modest means. What this bill does is turn that on its head,” he said. “Now they are asking for investors to put capital into credit unions and get a return on that capital.”

He went on to say that if credit unions want to travel down this road, they might as well become a tax-paying bank or mutual.

“There is plenty of room out in the market for the competition. We’re not out there to take over the entire book of business, but we should be able to grow reasonably,” Staatz said.

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