Discussion Looks At Capital Issues

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What are the options available to credit unions feeling limited by capital constraints?

Seeking answers to that question, the Filene Research Institute convened a colloquium at the University of Virginia's McIntire School of Commerce, bringing together experts, regulators and credit union executives to discuss the available alternatives.

Out of that meeting has come a new report from Filene entitled, "Managing Credit Union Capital: Subordinated Debt, Uninsured Deposits, and Other Secondary Sources," which details a number of avenues credit unions might pursue in order to access the capital they need to compete and grow.

During the Colloquium participants learned how other cooperatives raise capital, and how that affects ownership and governance. The discussion then focused on how legislation might help address credit union concerns over capital; a report on how members might respond to offers of uninsured shares paying a higher rate than insured shares; a look at how subordinated debt might be counted as capital under existing law; and an outline of a soon-to-be-released product designed to help credit unions meet their capital needs.

Among the key findings:

* Cooperatives in a number of industries, including agriculture, finance, insurance and exchanges are finding new ways to enlarge and strengthen their capital bases.

* Credit union trade associations see a need to adjust prompt corrective action (PCA) requirements to remove unintended effects.

* Research indicates that credit union members may be open to investing in uninsured savings products that return higher rates of interest than NCUSIF-insured accounts.

* Current law should be modified to allow regulators to change credit union risk-based net worth requirements.

* Permitting credit unions to issue some forms of subordinated debt does not compromise their cooperative principles and spirit.

"A fundamental question for credit union boards and managers is whether they are so focused on conforming to regulations on capital that they fail to consider alternatives that will enable them to serve more members and to better serve current members," said Bob Hoel, Filene's Executive Director. "This report is a roadmap for credit unions, their trade associations and their regulators through which to explore the possibilities for future capital accumulation. Subordinated debt, uninsured deposits, other secondary sources, and adjustment of some prompt corrective action (PCA) requirements are all tools credit unions can use to compete more effectively in the marketplace and to improve U.S. communities."

CUJ Resources

For info on this study and other Filene projects, (608) 231-8550 or www.filene.org.

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