Catalyst News

A Closer Look at the Strategic Value of Secondary Capital

by Catalyst Corporate | Feb 09, 2021

What strategic value does secondary capital offer credit union balance sheets?

The NCUA states that secondary capital can “protect a credit union against future losses and serve as a foundation for a credit union’s strategic initiatives and growth.”

What is secondary capital? Secondary capital is an uninsured loan the issuing credit union is permitted to include as regulatory capital. This temporary external capital allows low-income designated (LID) credit unions to grow and meet member needs with added safety.

One of the primary goals of secondary capital is to help credit unions support the members who need financial assistance the most. The injection of regulatory net worth eases growth and lending limitations that may exist, allowing credit unions to significantly increase support for these members, as well as expand their involvement in the local community.

Other benefits of secondary capital include:

  • Alleviates capital concerns associated with increased lending to lower-income families
  • Provides a springboard for community involvement, such as financial literacy campaigns
  • Eases balance sheet pressure on the net worth ratio
  • Facilitates growth hampered by capital constraints
  • Enables credit unions to be more competitive

By seeking authority to issue secondary capital, credit unions can take advantage of the flexibility it provides in deploying their capital. Effective uses are supporting safe credit union growth without capital dilution, expanding products or services to members, or even enlarging the credit union’s footprint. As credit unions grow and expand their services, they invariably increase their support to low-income families. This is a critical goal and prudent use of secondary capital.

While secondary capital can prove helpful to credit unions, this strategic initiative should be thoroughly analyzed to determine its financial viability. Business plan alignment, repayment ability and the purpose for requesting secondary capital are all factors the NCUA will review when considering an application. Among other requirements, these are mandated by NCUA in order to obtain secondary capital. Credit unions should also review the new Subordinated Debt rule, which will replace secondary capital, effective January 1, 2022. Additional details on the new rule can be found here.

If you feel your credit union, and its membership, would benefit from secondary capital, contact us today to schedule a free consultation.