NCUA Has a World of Capital Options

By Michael S. Edwards

Today I filed a comment letter with the National Credit Union Administration (NCUA) urging the agency to use the delay of its Risk-Based Capital Rules to expand credit unions’ capital options. If finalized, the proposal would delay the implementation of the Risk-Based Capital Rules until January 1, 2022, which would give the agency time to consider how best to rework the rule including potentially authorizing credit unions to issue perpetual capital shares modeled on NCUA’s rules for corporate credit union “Perpetual Contributed Capital” (PCC) instruments.

The proposal specifically mentions giving non-low-income credit unions subordinated debt as a capital option, however, my comments argued that the agency has statutory authority to go much further.  Credit unions in Australia, Canada and the United Kingdom, as well as co-operative banks in the European Union, already issue PCC-style investment shares modeled on the Basel Framework international capital standards that are perpetual in duration, absorb losses on a going-concern basis once retained earnings are exhausted, are uninsured, are non-withdrawable, can pay a dividend up to a contractual cap, are redeemable for cash at the credit union’s option with prior supervisory approval, and are the most subordinated claims on the credit union.

The Federal Credit Union Act gives the NCUA Board broad discretion to define its Risk-Based Capital Rules in a manner consistent with the Basel Framework (on which its Risk-Based Capital Rules is based) meaning that PCC-style investment shares could count as regulatory capital for all federally insured credit unions.  The NCUA Board can authorize federal credit unions to issue such shares as well under existing provisions of the Act, and most state-chartered credit unions would also be able to issues PCC-style investment shares if NCUA authorized them under state credit union act “wildcard” parity provisions.

Low-income designated credit unions could also count the PCC-style investment shares for Net Worth Ratio purposes as a form of secondary capital under existing Federal Credit Union Act provisions because PCC-style shares’ terms and conditions would be more stringent than the terms and conditions of subordinated debt secondary capital accounts.

A copy of my comment letter can be accessed at the link below.

Risk-Based Capital Rules Delay Comment Letter