<p>In the current excitement over credit unions' potential access to secondary capital, I am compelled to raise a cautionary flag. While I completely understand and agree with the need for secondary capital in appropriate situations, credit unions should not consider secondary capital to be a "Silver Bullet" solution. Unlike retained earnings (which – as the name implies – is generated organically from earnings), secondary capital will not be "free." Investors willing to accept the greater risks associated with such capital investments rightfully expect returns greater than those attainable from less risky investments. The cost of such investments will, therefore, be higher than the cost of other deposits, including certificate accounts. As with any funding source, it makes sense to acquire secondary capital funds only if the reinvestment rate (i.e., the net yields attained in use of those funds) exceeds their cost; otherwise, earnings and primary capital (the "cost-free" kind) will be reduced. If additional secondary capital is then acquired to compensate for reduced retained earnings, the credit union may find itself in a spiral of increasing costs and lower income. With this said, however, use of secondary capital may be a rational strategy for credit unions that find their capital diluted by rapid asset growth where they are able to deploy such funds in loans or other investments that return yields greater than the associated costs. My concern is that credit unions (especially those with lower capital as a result of already depressed earnings) will be tempted to use secondary capital without regard for the cost of such funds. If this occurs, or if such credit unions take imprudent risk to attain yields that exceed costs, individual credit unions and the system as a whole may be detrimentally impacted. Dave Styler CEO Lockheed Federal Credit Union Burbank, Calif.</p>

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