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Time to Chime in on Alternative Capital
Wednesday, May 3, 2017 7:00 AM

May 9 is the deadline for submitting comments to NCUA in response to its Advanced Notice of Proposed Rulemaking (ANPR) on Alternative Capital. An ANPR provides credit unions an early voice in shaping the future of capital for credit unions by calling for feedback and suggestions “prior” to NCUA drafting a proposal.

Suzanne Yashewski, Cornerstone’s SVP Regulatory Compliance Counsel, encourages credit unions to share their thoughts both with the League and with NCUA. Comments can be sent to NCUA via email at regcomments@ncua.gov. Include “[Your Name] – Comments on the Advance Notice of Proposed Rulemaking for Supplemental Capital” in the subject line.  Be sure to copy Suzanne at syashewski@cornerstoneleague.coop.

“We are not providing a sample comment letter at this time,” Suzanne explains, “as we truly want to hear what credit unions think on this issue. We anticipate that some credit unions will support the idea of flexibility in this area, while others may object due to concerns such as the potential impact on the tax exemption.”

Click here to view the ANPR.

Overview of ANPR on Alternative Capital
NCUA is seeking feedback on alternative forms of capital federally insured credit unions could use in meeting capital standards required by statute and regulation. “Alternative Capital” includes two categories: 1) secondary capital, and 2) supplemental capital.

Secondary capital is currently permitted only for low-income designated credit unions to issue and to be counted toward both the net worth ratio and the risk-based net worth requirement of NCUA’s prompt corrective action standards. The NCUA board is considering changes to the secondary capital regulation for low-income designated credit unions, as currently only 3 percent of credit unions with a low-income designation actually use it.

The NCUA board is also considering whether or not to authorize credit unions to issue supplemental capital instruments that would only count toward the risk-based net worth requirement. As a regulatory body, NCUA cannot change the definition of “net worth,” which is defined in the Federal Credit Union Act by Congress. However, NCUA does have discretion in designing the risk-based net worth requirement; the plan would be to permit credit unions that do not possess the low-income designation to issue alternative capital instruments. These would count toward only the risk-based net worth, not the net worth ratio.

The board believes that both secondary and supplemental capital would be considered securities. Issuers of securities are generally required to register with the Securities Exchange Commission (SEC) and comply with its rules and disclosures. Although credit unions might benefit from exemptions under SEC requirements to register, a number of other issues exist that credit unions would have to consider and comply with before issuing a security, including anti-fraud regulations.

Although flexibility is generally welcomed, some in the industry raise concerns that moving forward with these initiatives would benefit very few credit unions, yet could put the credit union industry tax exemption at risk.

With respect to FCUs, part of the basis for the credit union tax exemption was that Congress recognized most credit unions could not access the capital markets to raise capital. A concern is that thrift institutions lost their tax exemption in the 1950s because they had evolved from mutual organizations into commercial bank competitors operating similarly to banks.

With respect to state-chartered credit unions, the tax exemption applies to state credit unions “without capital stock” organized and operated for mutual purposes without profit. The IRS has not clearly defined “capital stock,” and we do not yet know if IRS would classify a supplemental capital instrument as capital stock, thereby threatening the tax exemption for state-chartered credit unions.

Questions and Issues to Consider

  • Do you support NCUA moving forward on alternative capital? 
    • If yes, what should it look like?
    • If no, why not?
  • Should additional supplemental forms of capital be included in the RBC numerator and how would including such capital protect the Share Insurance Fund from losses?
  • If yes, to be included in the RBC numerator, what specific criteria should such additional forms of capital reasonably be required to meet to be consistent with GAAP and the Act, and why?
  • If certain forms of certificates of indebtedness were included in the risk-based capital ratio numerator, what specific criteria should such certificates reasonably be required to meet to be consistent with GAAP and the Act, and why?
  • In addition to amending NCUA's RBC regulations, what additional changes to NCUA's regulations would be required to count additional supplemental forms of capital in NCUA's RBC ratio numerator?
  • For state-chartered credit unions, what specific examples of supplemental capital currently allowed under state law do commenters believe should be included in the RBC ratio numerator, and why should they be included?
  • What investor suitability, consumer protection, and disclosure requirements should be put in place related to additional forms of supplemental capital?