SUPPLEMENTAL CAPITAL A TOOL FOR SAFETY AND SOUNDNESS
Feb 26 Remarks of NASCUS Chairman Orla Beth Peck (UT) at Capital Panel at CUNA's GAC
I am here today as the Utah Credit Union Regulator as well as the Chairman of NASCUS- the professional association of state regulators. For over a decade advancing supplemental capital has been a NASCUS priority. The needed capital reform to provide natural person credit unions parity with nearly every other bank and credit union system worldwide is critical to the future health of the US system.
On a local level I have seen the need for this reform numerous times. For instance, starting in about 2001, I had to watch a small community credit union grow into PCA problems. There was a recession and loan demand dropped off dramatically. With low loan demand, it was hard for them to operate profitably. At the same time, there was a “flight to safety” and the credit union’s deposits increased. The credit union cut their dividends to below market rates; and still the money flowed in. They cut their operating expenses, and still capital dropped from 9.4% to 4.7%. They did every thing regulators suggested. They finally worked their way out of PCA in 2007. A merger opportunity came along and they jumped at it. I think the Board was just tired.
With Supplemental Capital, this credit union may have been able to raise the capital they needed to weather this storm. The members loved this credit union. You might say, they loved it to death.
As you know, keeping your shares and loans in balance is much easier said than done. Often times loan demand goes flat at the same time deposits are increasing. Intentionally shrinking your shares to increase the capital ratio can be a tricky proposition. Shrink them too fast and you can have a liquidity crisis, inadvertently make the members feel insecure, and you could have a run.
Supplemental Capital is not a panacea. It is expensive, it requires diligent and informed management and it carries risks. But Supplemental Capital is also not an exotic unknown that is somehow incompatible to the credit union movement. Our low income designated credit unions have access to it. And virtually all developed credit union systems worldwide, and all banking systems worldwide have access to it. In short Supplemental Capital is tool that is widely available in the world of depository instutions. Like all tools, it should be used properly by someone who knows what they are doing.
I, along with my colleagues at state agencies across the nation, believe our credit union movement has the ability to use this tool, effectively.
The use of Supplemental Capital should be part of the credit union’s strategic plan. Regulators are going to ask: 1. Why do you need it? 2. How long are you going to need it? How does it fit into your Business Plan, your ALM policy? 3. Are you going to be profitable given the increased cost? Regulators are not going to approve Supplemental Capital for a credit union that is structurally unprofitable with little hope for improvement. It should not be used to forestall the inevitable. But it should be an option for well-managed, well-run credit unions and has a variety of purposes.
Supplemental Capital could be used to:
1. Shore up Capital during a time of rapid growth such as a “flight to safety” situation or when a credit union has gone from being a closed field credit union to a community credit union with increased visibility.
2. Temporarily increase Capital to offset the greater risk in a new product or service.
3. Provide the Capital base needed to start a new credit union.
I am pleased to see that Supplemental Capital is now an industry-wide priority. NASCUS is now one of several voices calling for this important reform. Let us continue to work together to make Supplemental Capital a reality so that now more credit unions can "be loved to death" by their members.