Credit Union Capital Reform: Improving Regulatory Oversight

Credit unions remain the most highly regulated and restricted of all insured financial institutions.  In addition to the MBL cap, another area in which regulation impedes credit unions’ ability to remain healthy is capital and the statutory requirements imposed on credit unions in this area.

By law – not regulation, as is the case for other insured depositories – credit unions must maintain a 7% net worth (or leverage) ratio in order to be considered “well capitalized.”  The law also specifies that only retained earnings constitute net worth for credit unions. Credit unions are risk-averse; they do not generally engage in activities that are excessively risky.  Yet, the law does not permit NCUA sufficient authority to structure net worth requirements that are appropriate for credit unions’ risk levels.  THE LEAGUE strongly urges Congress to reform credit union capital requirements to permit NCUA to impose a risk-based asset approach to PCA, similar to the authority given to the Federal Deposit Insurance Corporation. We also ask Congress to modify the definition of credit union net worth to include alternative forms of capital for credit unions.  These new measurements would improve the safety and soundness of credit unions.

Credit unions historically have had the lowest default/delinquency rates in virtually all categories of loans and have maintained average net worth ratios well in excess of those held by banks.  Credit union capital reform will reinforce and strengthen the regulatory incentive for credit unions to remain exceptionally safe and sound.  And, it will allow credit unions to do even more to serve all their members.