Friday, March 9, 2012

Secondary Capital Is Not Core Capital

Legislation (H.R. 3993) has been introduced that will permit a credit union to count secondary capital as part of its net worth for the purpose of calculating its net worth ratio to meet its statutory Prompt Corrective Action (PCA) requirement.

However, secondary capital is not core capital. Its inclusion as core capital would inappropriately inflate the net worth leverage ratio and would represent a significant divergence in the regulatory capital treatment of credit unions and banks.

The leverage ratio should be based upon core capital, which consists of retained earnings and permanent paid-in capital. Secondary capital lacks an important characteristic that is associated with core capital – permanence. The bill specifies that the secondary capital would be subject to maturity limits as defined by the NCUA Board, which means that the secondary capital could be short-lived. Thus, this form of capital is distinctly different and less reliable than internally generated capital.

Also, H.R. 3993 will create a significant divergence in the regulatory capital treatment between credit unions and other depository institutions. U.S. bank regulators are in the process of adopting the Basel III capital framework. Basel III requires increases in both the amount and the quality of regulatory capital relative to banks’ risks, including a greater reliance on common equity.

In testimony before the House Financial Services Committee, when discussing Basel III, Acting Comptroller Walsh stated "a greater regulatory focus on common equity should make sense for all banks." The secondary capital instruments that could be permitted under H.R. 3993 would not count as common equity under the Basel III framework.

Any capital instrument that can mature should not be categorize as core capital. Secondary or supplemental capital is more analogous to tier-two capital for banks. Therefore, secondary or supplemental capital should be restricted to tier-2 capital to insure consistent treatment with bank capital regulations.


  1. Because it is not permanent it is temporary. But the NCUA will count it as part of the permanent core capital. Sounds like another NCUA hat trick. And this explains why both the trade associations CUNA & NAFCU fully support the NCUA on secondary capital. In bed together they enjoy each other's company. We can all see how this extra paid in capital helped the corporates avoid conservatorship. NOT!

  2. If credit unions returned to a risk-based capital standard (like the one in place before the bankers and their tool Rick Carnell in Treasury during the Clinton Admin foisted the current plan on credit unions), then this would not be an issue. Actually, the paid-in capital from credit unions that were members of the corporate CU helped reduce the final costs to the insurance fund.

  3. The Chairman and her staff are not regulators all they want is to be liked by the trade groups and the credit unions they are suppose to regulate. This is another example of her being a Cheerleader for the industry it is pathetic how politics are being used.

  4. Chairman Matz liked by the credit unions she regulates? Don't know what world you are in. She is generally despised because she keeps dumping regulations on credit unions and hardly takes any away. She will get light applause next week in DC when thousands of CU folks are in town for CUNA's annual DC BS affair.



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