NCUA recently released a white paper on alternative capital. The question most people ask is whether credit unions will ever get alternative capital. I think the more interesting question is whether credit unions can make alternative capital work in a member-owned cooperative. I would say the answer is that alternative capital is so foreign to the concept of mutuality that it will never work.
In the white paper, the NCUA described three forms of alternative capital: voluntary patronage capital, mandatory membership capital and subordinated debt.
All three forms of alternative capital described in the white paper have significant drawbacks. The voluntary patronage capital has a 20-year term, no voting rights, no early redemption and no secondary market, and it absorbs losses after retained earnings are exhausted but before shareholders take any losses. I can't imagine that very many investors would want to invest in voluntary patronage capital.
The mandatory membership capital is an interesting idea. It confiscates $50 from each member and turns it into capital that cannot be withdrawn. Good luck at the annual meeting explaining that idea.
The subordinated debt will be sold to investors outside the credit union movement with a five-year maturity. Unlike the other two forms of capital, this would not come from members. It would also not qualify for the BASEL III capital standards.
My conclusion is that alternative capital as proposed in the white paper is not an option for credit unions. That shouldn't surprise anyone. A member-owned cooperative is an alternative to a for-profit shareholder-owned bank. Adding alternative capital to credit unions is like crossing a hunting dog with an alligator because you want a water dog. That dog won't hunt. Shareholders are owners as much as they are investors. They want voting rights. Shareholders need a secondary market. They want a chance for capital appreciation. Credit union alternative capital doesn't give shareholders what they want.
The clear answer is that if credit unions want alternative capital, they can convert to a bank. Banks have both shareholders and customers and provide each with what they want. Credit unions can't have both shareholders and members. Shareholders are completely foreign to a credit union by design.
I firmly believe that alternative capital is necessary and important. But I also clearly see that you can't bolt alternative capital onto the cooperative member-owned organization without radically changing either the members’ rights or the shareholders’ rights.
Let's not ruin the credit union form of organization. We don't need a hybrid credit union/bank.
SAFE Credit Union
North Highlands, Calif.