WASHINGTON—With comments due Tuesday on NCUA's advanced notice of proposed rulemaking on alternative forms of capital, the credit union trades weighed in with their recommendations for how the agency should proceed.
NAFCU is calling for a framework on alternative capital to be developed through a pilot program that is similar to that NCUA used for its derivatives rule.
NAFCU’s EVP and General Counsel Carrie Hunt wrote: "A regulatory capital framework that authorizes supplemental capital would grant credit unions an additional option to guard against risk, achieve growth, and ensure that our industry remains a bedrock of stability for the 106 million Americans who currently look to credit unions as a vital source of affordable financial services.”
Hunt said NAFCU's approach to alternative capital emphasizes the following general principles:
· That the not-for-profit, mutual, member-owned structure of credit unions be preserved
· That their capital structure not be fundamentally changed and that the safety and soundness of the credit union community be preserved
· That a degree of permanence be established such that a sudden outflow of capital will not occur
· That credit unions be allowed feasible means to augment supplemental capital· That credit unions be provided a solution with market viability.
Hunt noted NAFCU's support for supplemental capital as an option for improving capital buffers, encouraging growth and meeting regulatory capital requirements, provided that credit unions' not-for-profit, cooperative structure is preserved. She also noted the association's support for modest changes to the approval and review of secondary capital issuers and she recommended the NCUA offer low-income designated credit unions broader call options to relieve certain market inefficiencies.
CUNA Urges Agency To Allow For 'Limited Experimintation'
In its comment letter CUNA said it supports the authority of credit unions to build additional capital, either from members or nonmembers, in a way that does not dilute the cooperative ownership and governance structure of credit unions.
“This additional capital should be subordinated to credit unions’ share insurance funds, so that credit unions have the financial base to offer member services and adjust to fluctuating economic conditions,” the trade association stated.
CUNA urged NCUA to create an environment for “limited experimentation” by credit unions in the creation of supplemental capital instruments, limited in an amount so as to not expose the share insurance fund to undue risk, but flexible so as to allow the development of the most appropriate instruments that will be useful and cost effective for credit unions.
“We recommend that at this stage the rule should not limit permissible supplemental capital instruments to one or two restrictively defined instruments. Rather, the rule should contain a number of requirements that any capital instrument would have to comply with, without specifying precisely how. Any issuance should be subject to regulatory approval prior to issuance, similar to the initial approach taken by the NCUA with derivatives,” CUNA said.
NASCUS: 'Do What Is Right'
In a 19-page comment letter, NASCUS President and CEO Lucy Ito said it is “incumbent on supervisory authorities to not just do the popular and the easy, but to also do what is right. As with NCUA’s derivatives rule, supplemental capital is the right thing to do. It is a potentially valuable ‘tool in the tool box’ of credit unions’ and regulators’ risk management, provides a capital buffer, and serves as a counter cyclical means to maintain service to members.”
The NASCUS leader wrote that including supplemental capital in risk-based capital ratio calculations is consistent with the statutory purposes of both state and federal credit unions and is sound public policy. She asserted that expanding credit union access to supplemental capital will not impair credit union mutual ownership and governance, nor imperil the credit union tax exemptions. She also wrote that NCUA should look to existing regulation found in state, federal and international regulatory regimes for instruction on shaping its rule.
NASCUS emphasized:
- Incorporating supplemental capital into credit union regulatory capital rules is good public policy.
- NCUA has the authority to issue a risk-based supplemental capital rule.
- Initial supplemental capital rules should focus on fundamental principles while allowing enough flexibility for the marketplace to develop and innovate.
- A regulation should maintain compatibility with credit union cooperative principles.