Are there other models out there to which credit unions should look for guidance on attracting new sources of capital?
That question and others were the subject of discussion during a a colloquium sponsored by the Filene Research Institute and the Center for Credit Union Research, at the University of Virginia's McIntire School of Commerce. Other questions examined included: Can credit unions attract new sources of capital to support their future growth expectations?; What instruments are available to strengthen the long-term capital position of the credit union movement?, and what products are currently available to meet capital needs?
Professor Michael Cook of the University of Missouri urged credit unions to learn from the experience of others, suggesting, "We've remained in our environmental silos long enough."
Traditionally, Cook said, credit unions and other cooperatives have assumed a defensive stance in their world view, focusing on protecting the assets of their owner/members. As these cooperatives mature, however, many have moved to an offensive stance, which generates the need for capital to enable future growth, he added.
The Filene Institute said it will release a detailed report on capital issues in the cooperative sector during 2004.
CUNA Senior Vice President Bill Hampel approached the question of capital accumulation from the perspective of law and regulation, examining how changes in NCUA's Prompt Corrective Action (PCA) rules might alleviate pressures on credit union capital ratios. High capital requirements coded in statute pose considerable difficulties for credit unions, Hampel said, and impose restrictions well beyond those placed on banks.
Unnecessary Restraint
The result is an unnecessary restraint of growth on healthy, well-managed credit unions. The solution, said Hampel, involves 1) giving credit unions access to secondary capital, and 2) reforming the rules attendant to PCA. However, significant changes on either front will require additional legislation, he noted.
Participants also heard presentations on specific ways in which credit unions might generate capital. Professor Jinkook Lee of The Ohio State University presented research findings on the inclination that members might have to accept uninsured deposit products. Lee's research demonstrates that given the appropriate information regarding return levels and safety and soundness issues, a significant segment of members would be inclined to place a portion of their funds in uninsured accounts.
James Wilcox, University of California-Berkeley professor and former chief economist for the U.S. Comptroller of the Currency, presented the model for using subordinated debt as capital for credit unions. Wilcox, author of two previous Filene studies on capital instruments and subordinated debt for credit unions, demonstrated how subordinated debt might benefit both credit unions and the NCUSIF by transferring risk from the fund to investors. He also advocated replacing net worth requirements under CUMAA with capital requirements
One New Product
A new product designed to give credit unions access to capital was discussed by CUNA Mutual Senior Vice President Tom Merfeld. In this program, credit unions can sell a subordinated debt instrument to CUNA Mutual. The instrument has a long maturity and is not insured by NCUA. It protects the credit union membership ownership rights. The product is being piloted with low-income credit unions, which are allowed to issue subordinated debt for purposes of raising alternative capital. This approach uses previous Filene research to develop a marketable product, and uses credit union resources to lower costs. Merfeld hopes that federal law will be amended to permit CUs that are not designated as low-income to also participate in the program.
