What is the Membership Capital Account (MCA)?
MCA is your credit union's contribution to the capital of Southwest Corporate. The capital funds are counted as secondary capital by Southwest Corporate, are not insured by the NCUSIF, are 100% at risk, and cannot be used to pledge against borrowings.
How is the MCA structured?
Southwest Corporate's formula for MCA requires a credit union to maintain a deposit equal to the lesser of one percent of its total assets, or $1,000,000, as reported in its previous year-end NCUA 5300 Call Report. Dividends are declared and paid monthly.
Why does Southwest Corporate need an MCA?
The NCUA regulation, Part 704, requires all corporate credit unions to maintain a capital ratio of at least 4% (Southwest Corporate, because it intends to maintain certain expanded investment powers, must maintain at least a 5% ratio). To achieve this, Southwest Corporate must rely both on its reserves and undivided earnings, and on its member-contributed capital. The NCUA regulation permits Southwest Corporate to take member-contributed capital deposits. MCA complies with this provision.
Given the extraordinary market conditions, on April 21, 2009, the NCUA took action allowing the use of an alternative capital level for purposes of regulatory compliance with NCUA's corporate credit union rule. The NCUA Board's Order stated that for purposes of compliance, corporate credit unions may use their capital levels, as reported on their November 30, 2008 Call Report, for purposes of determining regulatory compliance with the capital-based requirements and limitations in Part 704. As of November 30, 2008, Southwest Corporate had a total capital ratio of 6.46% and a retained earnings ratio of 3%, both well above regulatory requirements.
Can my credit union decide to withdraw its MCA funds at any time?
Yes. Should your credit union decide to withdraw its MCA funds, Part 704 permits Southwest Corporate to refund MCA funds, as of the date that is three years after the date that the withdrawal notice is given. During the three-year notice period, the funds in the account are no longer subject to any adjustments that are based on Southwest Corporate's formula for computation of the required MCA deposit. MCAs on notice remain 100% at risk and are subject to possible depletion. According to the NCUA regulation, no portion of the MCA funds may be released until the three-year notice period has passed. An MCA notice may be rescinded.
Are MCA funds federally insured?
No. Because MCAs are considered equity in Southwest Corporate, they are used in the calculation of our capital ratios and are available to cover losses that exceed retained earnings. They are not insured by the NCUSIF and they are not guaranteed by the NCUA's Temporary Corporate Credit Union Stabilization Fund (TCCUSF).
Will Southwest Corporate deplete MCAs?
Yes. Per NCUA's Letter to Credit Unions 09-CU-10, when a corporate credit union has a retained earnings deficit, MCAs must be depleted to the extent necessary to resolve the deficit. A portion of MCAs invested at Southwest Corporate will be depleted to cover the retained earnings deficit. It is possible that 100% of MCAs could eventually be depleted but any future action is tied to economic conditions and the strength of the recovery, particularly employment and housing prices. Southwest Corporate will update members on loss projections and the potential for additional impairments in the monthly Operating Insights letter and on the financial review webinars.
Will Southwest Corporate require members to replenish depleted MCAs?
Not immediately. We feel that credit unions need more certainty about any future investment losses in our portfolio and the new corporate credit union regulation (Part 704), that was published by NCUA for public comment on December 9, 2009, before being asked to invest more capital at Southwest Corporate. Southwest Corporate anticipates that members will eventually need to decide whether to replenish MCAs in conjunction with our need to comply with the new corporate credit union regulation. Southwest Corporate will update members regarding the status of the new corporate credit union regulation and our eventual plan to replenish MCAs.
If Southwest Corporate recovers losses on any of its' bonds, can that money go to member credit union's MCAs?
Not according to guidance provided by NCUA. The essential function of MCAs is to serve as an additional reserve of capital to absorb losses in excess of retained earnings. Southwest Corporate could only replenish MCAs from recovered losses should the NCUA issue revised guidance allowing such treatment.
