Filene Report Illuminates Alternative Capital Debate
MADISON, Wis. -- The Filene Research Institute has issued a research report designed to review critical issues involving alternative capital for credit unions, including the lack of agreement about how and even whether CUs should raise it.
The report, entitled, "Alternative Capital for U.S. Credit Unions? A Review and Extension of Evidence Regarding Public Policy Reform," presented no new research but instead sought to consolidate existing data and muster a complete discussion of the details, according to report author Robert Hoel, Fellow in Residence at the Institute.
"What we wanted to do was to collect the existing research which had been published in various places and to present it in a single source," Hoel explained. "We believe the issue of alternative capital is central to the credit union industry and that it needs a full discussion."
The report detailed the history of capital formation for CUs and other financial institutions and illustrated how credit unions, credit union members, and the public at large are ill-served by not allowing more credit unions to have access to alternative sources of capital. Currently, only low-income designated credit unions are permitted to raise alternative capital.
Hoel blamed lack of access to capital for six pernicious impacts on credit unions and credit union members, including: slower recovery from financial setbacks, fewer new credit unions, limitations on growth and the addition of new services, difficulty in achieving economies of scale, conversion of credit unions to bank and thrift charters, and overcapitalization.
The report broke the growth-and-services limitations and overcapitalization categories into two separate but related ones, according to Hoel. Because credit unions are limited to using retained earnings to build capital, each dollar of retained earnings represents hard-won money.
This may make some CUs both slower to offer their members new products and services that require capital investments and slower to expand the availability of some products and services to more of their members, choosing to keep their reserve of "safety capital" high.
If two credit unions of the same size and same economic environments have the same knowledge, and have equal access to capital, they will carry identical amounts of safety capital, Hoel noted in the report. "However, if one credit union can obtain new capital only through retained earnings and the other has many faster alternatives, the former should carry more safety capital than the latter," the report added.
Essentially, Hoel argued, giving credit unions greater access to other sources of capital would make CUs more willing to put their capital to use, although he acknowledged that there were institutional incentives across the industry that also impacted credit unions' capital decisions.
Significantly, however, the report also included the view of credit union leaders who worry about what such ability might do to the unique structure and nature of credit unions. John Tippets, CEO of the $4.5 billion American Airlines FCU, was something of a spokesman for that view. "Tippets believes that funding capital through retention of earnings is one of several characteristics contributing to credit unions' uniqueness," Hoel wrote. He later added, "Credit unions are highly democratic organizations, and it is not unusual to see differences of opinion on major issues like alternative capital. Evidence supporting claims that permitting alternative capital would diminish the uniqueness of credit unions is not strong in the eyes of this researcher.
Jim Blaine, CEO of the $15 billion State Employees' Credit Union, countered Tippets, saying that "If we pursue secondary capital, credit unions must define it, limit it, and use it on credit union terms."
Blaine, whose credit union has been a leading institution in the fight to get credit unions alternative capital sources, praised the report and highlighted the importance of the issue at hand.
"One of the things that gets my goat about the whole issue," Blaine said, "is the way that credit union members are not allowed to invest in their own credit unions--the institutions that they own."
Blaine argued that CU members should be able to make uninsured investments that carry a higher rate of interest in their own credit unions. He added that insurance concerns were no longer terribly relevant since many credit unions are carrying between 10%-15% uninsured deposits already, as members sometimes have more than the federally insured amounts on deposit in all their accounts.
Hoel said that the Institute distributed the report to its members--mostly credit unions and credit union leagues--and that he expected these organizations would use it as they chose to help continue the discussion and perhaps lobby lawmakers on the issue.
The National Association of State Credit Union Supervisors, which had particularly encouraged Filene to write the report, also praised its release.
"NASCUS is pleased that the Filene Research Institute studied alternative capital and released the report," said Mary Martha Fortney, President and Chief Executive Officer of the National Association of State Credit Union Supervisors.
"This study is important for credit unions because it presents factual reasoning about why alternative capital makes sense for credit unions," said Ms. Fortney. "The report presents a compelling message and we will use it as a tool to educate Congress and others within the credit union system about how alternative capital could benefit credit unions."