The capital cushion at a lot of credit unions may look cushy indeed compared to that of some banks, but stress in the financial industry has prompted some credit unions to intensify their fight for greater capital-raising freedom.

Some would raise capital to keep regulators at bay; others say they just need it to keep growing.

“The growth rate of your institution is tied to your capital,” said Robert Cashman, CEO of Chelsea’s Metro Credit Union, an institution keen to keeping its own growth brisk. But Cashman said Metro is getting uncomfortably close to bumping up against its own limitations, thanks to tight restrictions on how much capital it can bring in.

‘Sort Of Silly’

Compared to banks’ varied options, credit unions can currently only raise capital by hanging on to what they earn. And some are just fine with that; many credit unions keep gigantic capital cushions and are content with the pace of their growth.

But just as recent economic turbulence has roiled so much in the financial industry, it’s also given more urgency to some credit unions’ capital fight.

“The past three years have been tough on everyone,” said Bill Hampel, chief economist with the Credit Union National Association, a trade group.

Most credit unions are quite healthy – about 95 percent were “well-capitalized” at the end of 2009, according to CUNA’s analysis of National Credit Union Association data. But even among the healthy ones, slowed growth now means they’ll spend the next few years sitting in neutral, shoring up earnings, before they’ll have enough capital to expand their institutions, Hampel said.

“It’s sort of silly that credit unions be forced to do that,” Hampel told Banker & Tradesman.

The failure of several corporate credit unions, which serve as a type of bankers’ bank for the credit union industry, has created still more pressure, according to Peter Muise, CEO of First Citizens Federal Credit Union in New Bedford. Credit unions have had to bail out their own corporate credit unions through higher insurance fees, which took a massive bite out of net income last year and are poised to do so again.

“Now it’s very critical to have this [capital] conversation,” he said. But Muise highly doubts a busy Congress will actually do anything about the issue, disagreeing with CUNA’s Hampel, who believes lawmakers will address credit union capital issues this year or next.

The National Credit Union Administration (NCUA), credit unions’ national regulator, recently endorsed the idea in a study on the subject.

Capital limitations are hurting members, the paper stated: Some credit unions are discouraging new deposits, for example, because higher deposits mean the institution has to store up larger amounts of capital to cushion those assets. It’s a short-term fix that hurts the institution’s long-term health.

The paper’s author, Gigi Hyland, suggested a number of different types of capital raising instruments, including capital sold to suitable members, equity sold to all members or subordinated debt sold to institutional investors.

Not Without Risk

But there was a note of caution, as well.

Regulators do have limited experience with monitoring this type of capital, but those results have been “mixed.” While almost all credit unions can’t offer uninsured capital programs, a few designated low-income credit unions can – and haven’t always done so well with them.

In 2006, the NCUA had to address a number of credit unions’ lax oversight and planning of capital-raising activities. These included “failure to realistically assess” programs, and “premature and excessively ambitious concentrations of uninsured [capital] to support unproven or poorly performing programs,” among other things.

That adds fuel to critics’ view that credit unions – and their regulator – are out of their depth. Muise and other credit unions, angry that several corporate credit unions have gone into receivership thanks to sour investments, have said the NCUA failed to put a stop to the corporates’ reckless behavior.

And some credit unions themselves would rather steer clear of new capital-raising programs.

When credit unions sell capital, they’re selling off control of their own institution, said John R. Caulfield, CEO of St. Mary’s Credit Union in Marlborough. People in the industry downplay these ventures, but activities like this bring larger issues to bear on the credit union’s future.

“People forget when you’re accepting external investment into your organization in the form of capital, you answer to someone else now,” he said.