Advocate For Secondary Capital Outlines Reasons For Support

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If credit unions were unsure about the value of secondary capital, many of those questions were answered by one person here.

Tom Merfeld, senior VP-financial solutions with CUNA Mutual Group, told attendees at the CFO Council's Conference and Roundtable that secondary capital is ideal for the "fast-growing credit union."

But there's a catch: secondary capital still isn't permissible for most credit unions. The credit union trade groups continue to lobby for the expanded powers.

"If a credit union's growth is hampered by thin levels of capital, this alternative source may make sense," he said. "It allows the CEO, the board and management team to respond to member needs without worrying about the numbers. The numbers work."

Merfeld said the other advantages of secondary capital include:

* Provides competitive equity between credit unions and other institutions.

* Removes a reason often cited for credit unions' conversions to banks.

* Allows credit unions to recapitalize themselves out of near-PCA status.

* Protect the share insurance fund.

Merfeld spent much of his presentation helping CFOs determine if secondary capital might be right for their credit unions. He used a spread-sheet analysis to illustrate how a credit union can meet member needs and increase earnings. "It may seem like the cost is high, but it enables credit unions to meet member needs and grow earnings at the same time," he said.

Currently, NCUA-designated low-income credit unions can include secondary sources in the capital calculation for Prompt Corrective Action (PCA) purposes.

"It's (secondary capital) often structured as subordinated debt for GAAP reporting purposes, but can count as capital under regulatory accounting principles," Merfeld said. "This is what low-income credit unions have available to them."

As for risk-based capital versus secondary capital, Merfeld offered, "They are complementary issues. Risk-based capital is a richer measure of the capital strength of the credit union, whereas secondary capital is a tool to increase the capital strength of a credit union."

Leagues, trade associations and other industry leaders are working through legislative channels to help make secondary capital available to all credit unions. If granted, Merfeld said CUNA Mutual would make its secondary capital program-now offered to low-income credit unions -available to all qualifying credit unions facing the capitalization squeeze. CUNA Mutual's "Capital Notes" secondary capital program would utilize a trust. Credit unions would issue unrated, unsecured notes that the trust would then purchase, Merfeld explained. The trust would then go through a ratings process and issue its own notes that institutional investors, such as corporate credit unions, CUNA Mutual and other insurance companies, could purchase.

"Secondary capital is a way to level the playing field for credit unions, allowing them to better compete, and it can be structured to complement the cooperative nature of credit unions," Merfeld said.

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