Seeking to Water Down Corporate CU Capital Rules

Credit Union Journal (subscription required) is reporting that the Credit Union National Association (CUNA) and some corporate credit union officials are trying to water down the corporate credit union capital rules that were finalized in 2010 following the corporate credit union debacle.

Specifically, they are objecting to the requirement from the National Credit Union Administration (NCUA) that corporate credit unions when calculating their Tier 1 capital must deduct beginning on October 20, 2016 any amount of perpetual contributed capital (PCC) that causes PCC minus retained earnings, all divided by moving daily net average assets, to exceed two percent. After October 20, 2020, corporate credit unions must deduct any amount of PCC that causes PCC to exceed retained earnings, when calculating Tier 1 capital.

For example, CUNA wrote: "NCUA should eliminate the deduction of PCC from Tier 1 capital allowing PCC to be counted for all regulatory capital requirements as currently allowed by the corporate regulation until next year."

This means that a corporate credit union could fully meet its Tier 1 capital requirement through PCC.

However, this also makes the credit union system potentially less stable as the system becomes more interconnected.

As the corporate credit union meltdown illustrated, losses at corporate credit unions cascaded down to natural person credit unions, which caused natural person credit unions to write down equity investments in corporate credit unions.

NCUA argued in 2010 that without some minimum retained earnings requirement, corporate credit unions "would be a continued source of instability to the credit union system as a whole."

Maintaining the retained earnings requirement is good public policy. It would ensure that there is a sufficient loss absorbing buffer at corporate credit unions. This should improve the resiliency of the credit union system.

However, a better solution would be to require credit unions to deduct from their reserves some portion of any nonperpetual capital accounts at a corporate credit union and all perpetual contributed capital issued by a corporate credit union. But this would require congressional action.