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Filene report: Risk-weighted capital standards 'compelling' for policymakers
MADISON, Wis. (3/12/14)--The adoption of appropriate risk-weighted capital adequacy standards would put banks and credit unions on the same safety-and-soundness footing, making such standards a "compelling" consideration for policymakers, according to a new report from the Filene Research Institute.
The Credit Union National Association supports risk-based capital but has strong concerns that there's a multi-billion-dollar price tag of additional capital for credit unions attached to the National Credit Union Administration's proposed risk-based capital (RBC) rule. For risk-based capital to be implemented correctly, CUNA asserts, it must be part of overall capital and prompt corrective action reform---changes that will require congressional action.
The Filene report says that allowing credit unions to access alternative capital would bolster their stability during times of stress and strengthen their ability to grow in both good and bad times, according to the report, "Credit Union Capital Adequacy: What's New and What's Next?"
The paper outlines the mismatch between credit unions and investor-owned banks, focusing on the implications of Basel III capital guidelines, prompt corrective action (PCA), and the structure challenges of maintaining the principle of member ownership in the face of outside capital.
With risk-weighted capital adequacy standards, simple credit unions could stick with a leverage-only requirement, while those with more complicated balance sheets could opt for risk-weighted reporting, the report said.
For U.S. lawmakers, the case to revise the current regime is compelling, the paper said. Alternative capital would moderate draconian PCA requirements by providing an alternative to jacking up income or shrinking assets. The Government Accountability Office (GAO), the research arm of the U.S. Congress, concluded in 2004 that it was too early to recommend changes to credit union PCA, but the financial crisis showed that the risks posed by credit unions do not warrant more stringent PCA triggers.
The newly released U.S. final capital rule for banks should be catalyst for alternative capital reforms, the paper advised. A streamlined approach for credit unions that mirrors the rule, and related Basel III requirements, would support a safer, more resilient credit union system.
Where credit unions can issue alternative capital instruments, it is possible to balance the interests of member-ownership with those of outside, the paper said. Credit unions would be safer and more flexible with additional access to capital.
To download the paper, use the link.

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