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CUNA filed its comment letter today urging the NCUA to adopt a rule to allow credit unions to accept supplemental capital instruments to count towards the risk-based net worth requirement.
In the letter CUNA supported the authority of credit unions to build additional capital, either from members or nonmembers, in a way that does not dilute the cooperative ownership and governance structure of credit unions. This additional capital should be subordinated to credit unions’ share insurance funds, so that credit unions have the financial base to offer member services and adjust to fluctuating economic conditions.
CUNA urged NCUA to create an environment for limited experimentation by credit unions in the creation of supplemental capital instruments, limited in an amount so as to not expose the share insurance fund to undue risk, but flexible so as to allow the development of the most appropriate instruments that will be useful and cost effective for credit unions. We recommended that at this stage the rule should not limit permissible supplemental capital instruments to one or two restrictively defined instruments. Rather, the rule should contain a number of requirements that any capital instrument would have to comply with, without specifying precisely how. Any issuance should be subject to regulatory approval prior to issuance, similar to the initial approach taken by the NCUA with derivatives.
For Supplemental Capital for non-LICU credit unions CUNA recommends the following approach:
Any offering must preserve the cooperative, mutual nature of credit unions, and not alter the fundamental structure of the credit union.
The specific instrument used whether an equity instrument, paid in capital or another form of subordinated debt should be flexible and not prescribed in rule such that a credit union can best take advantage of the market and have the flexibility to structure the offering in a cost-efficient manner;
The instrument will be uninsured and subordinate to other claims and available to cover operating losses and only issued pursuant to regulatory approval;
Proper Consumer Protection, Securities/Anti-Fraud Provisions, and Disclosure Requirements should be provided, with proper suitability standards followed.
The rule should establish appropriate limits (volume limits based on a proportion of assets or a proportion of total capital) on how much and to whom it can be issued with appropriate suitability standards followed (other than small issuances).
This approach, enhances the safety and soundness of credit unions, and can be accomplished without altering the cooperative, mutual structure of credit unions. It does not confer or allow any membership rights or governance rights thus preserving the true nature of a credit union.
CUNA will continue to work with the NCUA as it moves forward to the proposed rule stage of the process. A copy of the letter can be viewed here.
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