Unfuzzy CU Math: Additional Capital Options = Loans 'Multiplied Many Times'

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Last] week, Credit Union Journal called attention to the important issue of resolving whether or not credit unions should be allowed to raise alternative capital ("Bid on Supplementary Capital Moves Forward," Sept. 28). The prohibition against alternative capital was put in place as part of the CU Membership Access Act of 1998 (CUMAA); and, currently, as the Journal rightly points out, only credit unions designated "low income" may raise it. I'm hopeful that the industry will work together to get the law changed so credit unions can issue member capital.

It's ironic that while CUMAA disallows issuing capital shares, it mandates Prompt Corrective Action (PCA), requiring credit unions whose capital falls below certain levels to set about a plan to restore it. Before CUMAA, CUs had never been forbidden to raise capital from outside sources. More than 20 state credit union laws allowed member or alternative capital accounts. Such a form of capital would further empower and underscore the self-help cooperative model.

Arguments often used against alternative capital include that it could jeopardize credit unions' "one member, one vote" premise or that it is inherently risky. Not if it's structured and disclosed correctly. Member capital can and should be non-voting. And, like any other paid-in capital, the nature and risks of member capital, as well as the rules governing it, would be fully and clearly disclosed before issuance.

Perhaps the most important reason for allowing member capital: strong capital allows credit unions to fulfill their primary mission of providing loans to members in need. A single dollar in member capital can be multiplied many times in loans. Yet, at a time when consumer credit is sorely needed to stoke the economic engines, the limiting definition of capital and precise net-worth requirements under PCA all but hamstring credit unions from making an even greater impact on the economy and, ultimately, their members' lives.

Jay Johnson, Executive Vice President
Callahan & Associates, Washington

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