Credit unions considered for ‘alternative capital’

Proposals on “alternative capital” and adjustments for inflation to civil money penalties were issued for comment by the NCUA Board at its Thursday meeting, in a short but significant session.

In issuing an “Advanced Notice of Proposed Rulemaking” (ANPR) for 90 days on alternative capital, NCUA Board Chairman Rick Metsger noted that he had “no preconceived notions” about the proposal, which covers both supplemental capital and secondary capital. “There are many different ways to structure capital,” he said, also noting that there are many side issues to consider, including structure, ownership, and tax implications (“especially for state credit unions”).

“There are significant implications of alternative capital for the credit union system, and this subject is just as important for credit unions who aren’t planning to issue alternative capital as it is for those who are,” he said. “To improve any future rulemaking, we need your thoughts on the pros and cons before we move forward to a full proposal.”

Board Member Mark McWatters noted that the proposal is the agency’s “first full-bore attempt at addressing this issue.” He noted that NCUA is taking a very careful approach; as an example, he noted the agency has hired outside counsel to address securities issues related to alternative capital at credit unions.

Stating that the ANPR includes two different categories (secondary and supplemental capital), the agency in its summary of the proposal explained that the proposal contemplates changing the secondary capital regulation for low income-designated credit unions (the only credit unions the FCU law allows to have the capital form), but authorizing other credit unions to issue supplemental capital instruments that would only count toward the risk-based net worth requirement.

The 50-page ANPR document has eight sections of “supplementary information,” which includes current and prospective use of alternative capital, supplemental capital legal authority (and potential taxation implications), securities law applicability and “other investor considerations.”

In other action, the board issued for a 30-day comment period an interim final rule on civil money penalties adjusted for inflation. According to the agency, the penalties being proposed for 2017 are 1.6% higher than the maximum levels in 2016. The adjustment is required under statute; the last adjustment was June, 2016. NCUA pointed out that Congress changed federal law in November 2015 to require annual adjustments; previously, the adjustments were made every four years.

ANPR on alternative capital

Interim final rule, adjustments to civil money penalties