As any responsible strategic planner would also advise the more options available to credit unions the better. Access to alternative capital should be an allowed strategic business tactic for credit unions that want to shore up their financials or want to leverage their franchise to gain market share. Growing capital only through retained earnings in today's dismal economy and cutthroat marketplace seems a fool's errand.
If incorporated into its business strategy, alternative capital can assist a credit union to match its competitors in deploying infrastructure, inject more market discipline into its operation, and give its members (and nonmembers) a chance to tangibly invest in the institution. These outcomes are highly desirable.
Whether one calls it alternative capital, secondary capital, supplemental capital, Tier 2 capital or paid in capital, such alternatives should act like equity capital even though they technically are not. Any alternative capital instruments must meet investor expectations concerning rewards for accepting risk and lack of liquidity. Although some advocates may naively believe that members will charitably invest in alternative capital simply to support credit union philosophy, it is unlikely to happen in the real world.
If available, credit unions of all sizes could choose to exercise the alternative capital option. This is in sharp contrast to industry trade associations' current legislative objectives that, if achieved, would only benefit larger credit unions. Rather than waste finite political capital chasing illusive new powers and congressionally resisted reduced capital requirements, the credit union industry would be better served seeking the legislative and regulatory changes needed to attract new capital through alternative sources. The potential payoff is exponential.
Some within the industry oppose adding the option for alternative capital. Perhaps they haven't done their due diligence concerning the positive affect this new flexibility. Hopefully, industry naysayers' resistance to change won't simply result in the pooling of shared ignorance or knee-jerk philosophizing. These skeptics have no excuse for remaining uniformed.
In 2007, the Filene Research Institute released "Alternative Capital for U.S. Credit Unions?" Written by Filene Fellow in Residence Robert F. Hoel, the report brings together all of the contemporary research on the subject.
NASCUS also has a 2005 white paper (entitled "Alternative Capital for Credit Unions--Why Not?") that is worth reviewing. The discussion about the characteristics of member paid in capital, nonmember paid in capital and subordinated debt are crucial to understanding the relevant marketplace issues.
Providing access to alternative forms of capital may be the most important strategic initiative the industry can take to ensure its future viability and success. The failure to do so could prove fatal for the charter. It is now or never.
The views expressed here represent my own professional opinion and do not necessarily reflect the opinions of any client or organization with which I may be affiliated.
Umholtz Strategic Planning and Consulting Services