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American Banker: Credit union capital requirements stifle access to credit

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Historically, credit unions provided a counter-cyclical balance when the economy weakens by offering a ready source of lending to members and as a safe harbor for deposits. However, the current statutory framework for credit union capital introduces a set of unintended consequences that constrain lending and deposit-taking activities while increasing customer costs at the very time that services are needed most.

Under current law, retail credit unions cannot raise capital. Unlike all other federally insured depository institutions that have access to some form of supplemental capital (including low-income credit unions), retail credit unions can only improve their net worth through retained earnings. 

Like all other federally insured depository institutions, credit unions are subject to Prompt Corrective Action rules, a set of capital-based supervisory standards. The combination of PCA rules and a restrictive statutory definition of net worth, however, create unique challenges for retail credit unions during stress periods and make it more difficult for them to address capital deficiencies should they arise.

In the years following enactment of PCA, credit unions largely enjoyed a favorable economic environment resulting in sustained strong performance. But as the recent financial crisis unfolded, credit unions faced unique challenges.

As markets became volatile and a general uneasiness fell over the investing public regarding the relative safety of instruments traditionally viewed as low-risk, credit unions were viewed as a safe haven. But at the very time consumers were looking to move their money into credit unions to shelter them during a crisis, the influx of deposits was causing a reduction in the net worth ratios of many credit unions.    

As the crisis grew, banks tightened underwriting terms. The result is the credit crunch that has yet to abate.

To read the complete article on American Banker, click here.

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