New Research Reinforces Need for Credit Union Access to Supplemental Capital

A special message from Mary Martha Fortney, President and CEO,
April 2011

A new white paper authored by Dr. James A. Wilcox titled “Reforming Credit Union Capital Requirements” presents a strong case that supplemental capital is an important and necessary reform for credit unions.

The white paper was commissioned on behalf of the Credit Union Supplemental Capital Coalition, a broad-based group of credit unions who support expanded capital authority for credit unions.

NASCUS and state regulators have believed for years that supplemental capital is appropriate for credit unions, a necessary tool for safety and soundness and critical to the credit union system’s long term health and sustainability.

In the paper, Dr. Wilcox explains that current credit union capital requirements restrict credit unions’ ability to both act as safe harbors for depositors and to act as a countercyclical source of lending. The author demonstrates that better access to capital for credit unions would enhance safety and soundness as well as contribute to the economic recovery.

The paper also responds to a 2004 report of the Government Accountability Office (GAO) which concluded that the limited capital authority of credit unions was adequate at that time. Dr. Wilcox explains that given the financial markets and credit crisis of 2007-2009, the credit union capital system must evolve in response to the changes in the financial landscape.

“With better access to capital, not only could the safety and soundness of credit unions be enhanced, but credit unions would be positioned to offset the reduction in bank lending that has contributed to past recessions and slowed the current economic recovery,” wrote Wilcox.

Dr. Wilcox’s paper reinforces NASCUS and state regulators long held belief that permitting credit unions access to supplemental capital not only makes sense, but it is critical to the safety and soundness of the credit union system.

NASCUS continues to encourages Congress to change the net worth definition in the Federal Credit Union Act to allow other forms of capital to be counted toward net worth. As evidenced by the development of the third iteration of Basel standards, international regulators are capital planning far into the future and addressing prospective capital considerations for banks and other financial institutions.

Unfortunately for credit unions, relying on just retained earnings for net worth does not provide needed flexibility for capital planning. It also limits the ability of the nation’s more than 100 million credit union members to reinvest in their credit unions and in some cases to access their credit unions during times of increased savings. Credit unions cannot thrive and compete under these archaic capital standards, and we recommend Congress take action on credit union capital reform.  I encourage you to read the white paper here and give us your feedback on supplemental capital for credit unions.