Q&A on Supplemental Capital for Credit Unions

Updated June 2010 - NASCUS continues to advocate for supplemental capital for credit unions. Due to the troubled economic environment, capital for credit unions is a pressing topic among state and federal regulators and credit union executives. NASCUS has received many inquiries about supplemental capital for credit unions. Find below some commonly asked questions on the topic.

What is supplemental capital?
Supplemental capital for credit unions is an at-risk liability or equity account that acts as a buffer to the share insurance fund in the event a credit union depletes its retained earnings. Access to supplemental capital would allow credit unions to raise capital outside of retained earnings sources.

Who uses supplemental capital?
Banks and thrifts in the U.S. and foreign markets have access to supplemental capital. While natural person, non-low income, credit unions in the United States do not have access to supplemental capital, corporate credit unions and low income credit unions in the United States do have access to supplemental capital.  Internationally, most developed credit union systems allow access to supplemental capital.

Why does NASCUS believe credit unions should have access to supplemental capital?
NASCUS and state regulators believe access to supplemental capital for credit unions is a critical safety and soundness issue. Access to supplemental capital will allow credit unions to react more quickly in economically challenging times and better prepare for the future.

Are other groups (NCUA, CUNA, NAFCU) supportive of supplemental capital?
All three NCUA Board members have expressed support for supplemental capital. NCUA Chairman Debbie Matz sent a letter to House Financial Services Chairman Barney Frank (D-Mass.) in December 2009, stating that supplemental capital could offset the impact to net worth of increasing consumer deposits. NCUA Board member Gigi Hyland has spent more than a year discussing supplemental capital with NASCUS, state regulators and NCUA senior staff.  She recently released a white paper indicating that supplemental capital for credit unions is an appropriate policy consideration. NCUA Board member Michael Fryzel has also publicly expressed his support for credit union access to supplemental capital. Further, credit union trade organizations CUNA and NAFCU are in favor of supplemental capital for credit unions (with certain parameters).

What regulatory principles have to be met for supplemental capital?
NASCUS believes that several key underlying principles for supplemental capital must be met:  1) Maintain cooperative structure and mutuality of credit unions; 2) Provide for full disclosures, investor protection and robust safeguards; 3) Maintain prudent safety and soundness requirements; 4) Require regulatory approval of supplemental capital plans; and 5) Maintain consistency with Internal Revenue Code to maintain credit union income tax exemption.

A task force of NASCUS state regulators, NCUA Board member Gigi Hyland and NCUA senior staff continue to discuss the regulatory considerations for supplemental capital.

What would a supplemental capital model look like?
There are many different forms of supplemental capital.  For natural person credit unions, the three most discussed forms are: 1) a mandatory membership capital instrument; 2) a voluntary membership capital instrument; and 3) a subordinated debt instrument.

What about risk-based capital requirements?
NASCUS supports a risk-based capital system, as well. Credit unions need comprehensive capital reform, access to both supplemental capital and risk-based capital requirements. They are not mutually exclusive.

What is NASCUS doing to achieve supplemental capital for credit unions?
Interest in supplemental capital is building as credit unions seek additional ways to raise capital to fight losses, adapt to the economic pressures, and manage increased deposits. A statutory amendment to the definition of net worth in the Federal Credit Union Act is needed to allow for this change. Following the definition change, state and federal regulators would develop regulations to govern and supervise supplemental capital for credit unions.  

NASCUS continues to encourage Congress to make the necessary change to the Federal Credit Union Act. We are also furthering our dialogue with NCUA, Treasury and the credit union system to build momentum and support.

NASCUS has also testified before Congress numerous times about supplemental capital for credit unions and developed a white paper that presents three supplemental capital models. Further, NASCUS and state regulators have written to and met with Congressional leadership about the importance of capital reform for credit unions including supplemental capital.

Where can I get more information?
If you have questions about the supplemental capital, the NASCUS Web site has additional information here or you may contact Brian Knight at brian@nascus.org.