The COVID-19 pandemic brought many changes for credit unions. These changes came in the form of stimulus packages, government programs, excess liquidity on balance sheets, and more. But there’s another important program surfacing that’s important to know about—let’s talk about The Emergency Capital Investment Program (ECIP).
The Problem at Hand
Capital is VERY important to a credit union. It represents the retained value of the member-owners of the organization. It is also the cushion to protect depositor assets if the credit union has unforeseen losses. A sound capital cushion is needed to be considered a “well-capitalized” organization according to regulators. Credit unions loan roughly 9 dollars for every 1 dollar of capital held in reserve.
Prior to the pandemic, credit unions largely were largely limited to one source of capital: retained earnings from operations. Other than in limited circumstances, credit unions could only grow capital from earnings generated and kept each year.
This is important in two ways: The more dollars of capital a credit union has, the more deposits it can take on ($1 of capital could allow for $9 of deposits, $2 of capital allows for $18 of deposits). The second reason growing capital is important is that it allows for the CU to grow to serve more members. Due to recent stimulus, credit unions got a huge influx of deposits. Since capital couldn’t grow rapidly in the short term, those deposits created pressure on the “9:1” ratio we referenced above.
Credit Unions and Capital
So, our government officials had a lot to deal with during COVID.
Our government first attempted to remedy the economic carnage of the shutdown by issuing stimulus – both to companies and to individuals. This was followed by another round of further stimulus.
The problem that remains is that this money is going directly onto Credit Union and bank balance sheets (disrupting the 9:1 normal ratio) and is not getting spent very quickly. Further, individuals are saving up for possible additional distress – exacerbating the swelling of deposits.
Given officials foresaw that this flood of money would disrupt capital ratios, a program was put into place to help eligible institutions by injecting more capital onto their balance sheets at very favorable terms. This injection would then help take the pressure off of the declining 9:1 Asset to Capital ratio.
This program is called ECIP or Emergency Capital Investment Program. The ECIP aims to solve the capital challenge by allowing banks and credit unions to take on additional capital investment directly from the U.S. Treasury through this program. The capital would be treated like other forms of capital for net worth calculations and would bolster the capital to asset ratio we described previously.
The sheer value of this program cannot be overstated. Credit Unions have been looking for ways to decrease the size of their balance sheets since the first round of stimulus started. This program could alleviate a tremendous amount of that pressure.
Further, the ECIP could dramatically expand the extent that a credit union could expand services and capabilities to eligible members. For example, if a $1 billion credit union were to receive $100 million under this program, they could expand their balance sheet to $2 billion in assets (roughly 9:1 ratio). Thus the program could truly benefit credit union recipients while helping communities in need. More on that second part below.
Credit unions and banks that participate in this program will be better suited to handle excess deposit flow onto their balance sheets than they would be without the program.
More About the Program and Who It Benefits
The Emergency Capital Investment Program, administered by the U.S. Department of Treasury, seeks to aid “financial institutions to augment their efforts to support small businesses and consumers in their communities.” For community banks and credit unions, this means providing nine billion dollars in funding across both industries.
According to the U.S. Department of Treasury, this program was designed with the intent of supporting “low- and moderate-income communities, minority communities, rural communities, underserved areas, consumers, small businesses, and nonprofit organizations.” Thus there is a component to qualifying that requires the recipient of the capital investment to be a Federally Chartered Credit Union and a Community Development Financial Institution (which is not the same as a low-income designated (LDI) credit union.
When reviewing applications, the treasury will decide what institutions are eligible based on available program funds. Funds distributed can be expected to support small or minority-owned businesses and consumers who were inordinately affected by the economic downturn due to the global COVID-19 pandemic. As such, qualification for favorable rates will depend on documented results benefiting those groups.
The ECIP comes with benefits beyond just funding. Those who qualify for ECIP will not pay interest on the capital investment for 2 years. After the initial 2 year period, they will pay interest at a rate determined by achieving certain qualified lending growth targets. Depending on how they do relative to those targets, the rate after year 2 could range from less than 0.50% up to 2% per year. By the 15th year, the investment must be repaid in full.
The deadline to apply for The Emergency Capital Investment Program has been extended to July 6, 2021. For more information, contact your trusted credit union advisors here at Newcleus Credit Union Advisors.
At Newcleus, we understand your operational responsibility and desire to provide maximum impact. As a result, we aim to provide foundational support that is meaningful and ensures you and your organization’s ongoing success. Contact us today to see how we can help!