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The NCUA board recently issued an ANPR seeking comments on alternative forms of capital for federally-insured credit unions. Perhaps the thorniest issue on which the ANPR invites comment is the extent to which alternative capital might pose a threat to credit unions’ federal income tax exemption. As in the past, no doubt some commenters will see the taxation threat as a “third rail” that justifies the avoidance of all exploration of alternative capital. However, the credit union system is probably better positioned today than ever before to develop these long-overdue capital formation tools – without significantly jeopardizing the vaunted tax exemption.

The ANPR uses “alternative capital” to mean both “secondary” and “supplemental” capital. Secondary capital is available today to low-income credit unions to help them meet both net worth ratio and applicable risk-based net worth requirements. On the other hand, “supplemental capital” may be available to some federally-insured, state-chartered credit unions (depending on state law) and may someday be authorized for federal credit unions. However, as currently envisioned, “supplemental capital” would only be useful in meeting credit unions’ risk-based net worth requirements.

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