CUs O-fer in Secondary Capital Plan Appeals to SRC

Credit unions have a zero batting average for secondary capital plan appeals to the Supervisory Review Committee (SRC) of the National Credit Union Administration (NCUA) during the first seven months of 2019.

Five credit unions appealed the denial of their secondary capital plans from the NCUA Region Directors. Four of the appeals involved applications to accept secondary capital and one appeal was to increase the amount of secondary capital accepted by the credit union.

The SRC upheld the denial of the Region Directors in all five cases.

Below are some of the highlights from the SRC decisions.

In several cases, credit unions stated that they met the five requirements of the rule and should be allowed to accept secondary capital. (12 C.F.R. § 701.34) However, the SRC opined that "there is no duty for the Regional Director to approve a secondary capital application simply because the plan meets the five requirements of the rule." The SRC concluded that it is within the authority and discretion of the Regional Director to review the safety and soundness exposure of the credit unions.

The SRC found deficiencies in various credit union's plans, which in some cases were overly simplistic or inadequate. In a couple cases, the credit unions stated the secondary capital was meant to support loan growth without specifying the types of loans the credit union will add to their balance sheets. The SRC believed that subject ambiguity posed a safety and soundness concern.

In one case, the Region Director sought to reduce the amount of secondary capital that the credit union could accept because of safety and soundness concerns due to interest rate risk associated from concentration in real estate secured assets. The Regional Director wanted to reduce the amount of balance sheet leverage at the credit union. In addition, the credit union should not make unsecured secondary capital loans to other credit unions. (Read the decision SRC-03-19).

Another credit union's secondary capital plan posed safety and soundness concerns due to inadequate liquidity risk assessment, incomplete interest rate risk assessment, and no exit or stop-loss strategy. (Read the letter SRC-02-19).

In another decision, the SRC concluded that "the credit union failed to assess key risks arising from the plan’s reliance on high levels of market sensitive wholesale funding (nonmember deposits and borrowing) and deployment of funds into higher risk assets." Here is letter SRC-01-19.

Furthermore, as part of a credit union's board of directors due diligence, the board is expected to address the pros and cons of the specific secondary capital plan, not a generic discussion about the pros and cons of secondary capital. In one case, there was not evidence that the board discussed the specifics of the secondary capital plan.

Read SRC-06-19.

Read SRC-05-19.