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The ongoing debate for credit unions’ access to supplemental capital has been a long and strenuous battle.
To gain a better understanding of the issue at hand, it’s necessary to highlight why credit unions are pushing to gain access to these additional funds—and the extensive impact this could have on local communities.
Most U.S. credit unions generate capital entirely through retained earnings. As credit unions accept more deposits from members, assets grow but net earnings do not necessarily follow. As a result, capital may decrease.
Let’s recall Bank Transfer Day in November 2011. It was an exciting time to be a part of the credit union movement. That is, until you think about what thousands of additional deposits mean to the bottom line—a decrease in capital for many credit unions.
This dip could be enough to reduce some credit unions’ capital levels below 7% and into the range where they’re subject to Prompt Corrective Action (PCA) rules, where a credit union must submit a plan to NCUA that outlines its goal to raise capital above 7%.
Credit unions get painted in a corner: Those that do an excellent job of serving their communities by accepting deposits are penalized with a reduction in capital. This more than takes away the excitement from Bank Transfer Day or other events that highlight the good a credit union offers its community.
Add to this the reality of challenging economic times, which create an even larger need to help consumers by providing a safe haven for their hard-earned savings.
Despite historically low dividend rates since 2008, deposits keep flowing into credit unions due to consumers’ “flight to safety.” This year-over-year deposit growth caused credit unions’ overall loan-to-share ratio to decline by 140 basis points during 2012, from 69.6% to 68.2%, according to CUNA’s economics and statistics department.
Under such conditions, it’s obvious the Federal Credit Union Act of 1934 handcuffs credit unions. Without access to supplemental capital, it’s more difficult for credit unions to lend, accept deposits, or otherwise meet members’ needs to the full extent of their ability.
Ironically, this is the very reason credit unions were founded: to help consumers obtain affordable credit, find a safe place for their funds, and assist their local communities.
Giving credit unions access to supplemental capital is both appropriate and sound monetary policy. Doing so would give credit unions the opportunity to grow and expand their branches, services, and community outreach where there is public demand.
The Credit Union Act’s capital restraints may have been appropriate at one time, but they’ve long since served their purpose. Given current economic conditions, it’s time for a change.
In February, Reps. Pete King (R-N.Y.) and Brad Sherman (D-Calif.) introduced the Capital Access for Small Business Act (H.R. 719), which would allow well-capitalized credit unions to match a growing deposit base with capital from sources other than retained earnings—without jeopardizing credit unions’ “one member, one vote” principle that is the bedrock of the credit union ownership structures.
“Congress is showing greater interest in capital reform, and we expect our legislation to be part of the discussion,” says John Magill, CUNA’s executive vice president of government affairs.
Allowing credit unions to access additional capital won’t take any money from tax payers. But the value it can provide allows for a significant impact on local communities while creating a safety net during tough economic times.