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NCUA takes a step toward permitting CUs to issue alternative capital

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NCUA takes a step toward permitting CUs to issue alternative capital

The National Credit Union Administration board is moving forward with exploring the pros and cons of allowing credit unions to seek alternative means of capital.

During its Jan. 19 meeting, the board approved an advance notice of proposed rulemaking to solicit comments on a possible rule governing the issue. The board in October held a briefing on the topic in which staff outlined a number of challenges for the agency in formulating such a regulation. Those included tax implications, fraud prevention and investor suitability.

The notice identifies two categories of alternative capital: secondary and supplemental. Supplemental capital for credit unions is an at-risk liability or equity account that acts as a buffer to the share insurance fund in the event a credit union depletes its retained earnings, said John Fairbanks, NCUA spokesman. Secondary capital is, essentially, certain products — shares, share drafts, and share certificates — that low-income credit unions only can accept from nonmembers. It is intended to give the low-income credit unions a little more lending capacity and allow them to better serve low-income communities, Fairbanks said.

By law, secondary capital counts toward both the net worth ratio and the risk-based net worth requirement of the NCUA's prompt corrective action standards, the NCUA said.

At the Jan. 19 meeting, NCUA supervisory financial analyst Steve Farrar said the notice invites comments on any and all aspects of alternative capital. "We need to hear from all points of view in order to prepare a useful regulation," he said. The regulator especially wants to hear from low-income designated credit unions on the issue of secondary capital, he said.

NCUA board member J. Mark McWatters said he does not want the NCUA to waste time and resources putting together a rule that ultimately helps no one. He called the action the first "full-bore" attempt at addressing an issue that has been floating around the credit union space for years. McWatters said the regulator is taking a careful and methodical approach and even hired outside counsel to address securities law issues that may crop up.

But McWatters stressed that the regulator needs to hear from credit unions because they will be issuing the capital, not the NCUA. "If they don't work in the marketplace, if your investors cannot earn a risk-adjusted rate of return ... and if you cannot employ the capital in a way that you can earn more than you pay to the investors, then this is all for naught," he said.

NCUA Chairman Rick Metsger said he has no preconceived position on the issue and added that he is aware that many credit unions would have no interest in issuing new forms of additional capital. Metsger pointed out that there are 2,426 low-income designated credit unions but only about 3% of them issue secondary capital. He said about 75% of all secondary capital in the system is held by a handful of credit unions.

Board members said they want to hear from even those institutions with no plans to issue more capital because such a regulation would impact the share insurance fund and the fundamental question of what it means to be a credit union.

The National Association of State Credit Union Supervisors said in a statement that it has a long record of encouraging the NCUA, Congress and others to embrace capital reform for credit unions as a tool for enhancing safety and soundness. NASCUS believes that a capital structure limited exclusively to retained earnings significantly disadvantages credit unions in facing unexpected economic shocks, and penalizes well-run institutions that are attracting deposits too quickly.

Comments on the issue must be received within 90 days after publication in the Federal Register.