Secondary Capital

Given NCUA's recent decision to designate over 1,000 federal credit unions as low-income credit unions, the agency needs to revisit its regulations governing secondary or supplemental capital for low-income designated credit unions.

Low-income credit unions have the authority to issue secondary capital accounts that are uninsured and subordinate to all other claims, including claims of creditors, shareholders and the NCUSIF.

However, NCUA in a 2010 report noted its experience with the depletion of supplemental capital accounts at corporate credit unions and low-income designated credit unions had raised reservations.

NCUA acknowledged that heighten disclosures may not be sufficient to inform investors about the risk and uninsured status of the secondary capital accounts. Moreover, in an August 14, 2003 letter to Representatives Oxley, Frank, and Sherman, the agency wrote that "experience has shown that when uninsured accounts are offered to natural-person customers of a financial institution, and then the accounts suffer losses, confusion about insured status and issues of reputation risk and systemic confidence result."

NCUA needs to develop and enforce disclosure standards sufficient to inform prospective investors of the risk and uninsured status of such supplemental capital accounts. The agency also needs to put in place suitable standards to protect investors and credit union members.

Furthermore, if credit unions are allowed to offer these accounts to one another, this could increase systemic risk. Ideally, a credit union investing in secondary capital issued by a low-income credit union should be required to deduct this investment from its net worth. However, credit union net worth standards are written into law, so NCUA does not have this discretion. The next best alternative is for NCUA to put into place real and meaningful limits on the amount that credit unions may invest of their net worth in the secondary capital of a low-income credit union.

Additionally, secondary capital is not core capital and no credit union should rely entirely on secondary capital as its source of net worth. NCUA needs to specify a required minimum amount of primary capital that a low-income credit union should hold.

NCUA is well aware of these issues; but has failed to act. NCUA needs to promulgate regulations overseeing these concerns with respect to secondary capital.