Vocal CU Leaders - Now's the Time for Alternative Capital

"We are not the only financial institutions doing this," Blaine said. "Banks and thrifts and other financial institutions are busy as beavers raising additional capital for the problems they know they have or what might be coming. Credit unions are the only ones who are asked to go into this fight with our hands tied behind our back."

In anticipation of the Web event, Filson wrote a report on the topic this past July, which made the point that credit unions facing capital challenges under the current system face a short list of potential options. They can shrink the balance sheet, an approach Filson compared to "using leeching to cure a patient under old medical practice."

They could inject capital from the NCUSIF in the form of loans or guarantees, or they can merge the faltering institution into another credit union and use the surviving credit union's "surplus" capital to meet the prompt corrective action requirements.

"In essence, the current capital system for natural person [credit unions] assumes that credit unions will maintain, at all times and for all circumstances, enough capital to meet the 6%-7% adequately capitalized standard," Filson wrote. "An analogy to this approach would be telling members they should never borrow but always spend from savings for whatever purchases they need."

"No matter what occurs in the economy–natural disasters, changes in the business model or community needs–credit unions are required to respond with only the resources on hand," Filson added. Blaine suggested that the current economic conditions, particularly in the harder hit parts of the country, meant that the time has passed for the credit union industry to let itself be paralyzed over the capital question and to keep focusing on industry insider politics.

"Too many people have been concentrating on getting CUNA and NAFCU together on this," Blaine said, characterizing NAFCU's position as opposed to alternative capital for credit unions and CUNA's as stuck in neutral. "That is really an example of moving the deck chairs around on the Titanic. It's fine for some in the industry to oppose alternative capital for credit unions. Once the tools are in place, don't use them. But don't stand in the way of other people being able to use them."

Filson made the point that the capital rules for credit unions appear particularly arbitrary because they are not uniform across the industry. Corporate credit unions, low-income credit unions, CUSOs and privately insured credit unions all possess various capital options that they have used to good effect, Filson observed.

Further, Filson noted, the current capital rules encourage capital hording and failure to deploy capital to as much good effect as it could have.

"Over the past 40 years, Congress passed major credit union legislation on average once in a decade," Filson wrote. "This year is CURIA. Might a one-sentence change to the FCU Act authorizing membership capital accounts, subject to NCUA rules, be feasible? Such an action would be about more than safety and soundness, as important as that is; it would reaffirm the unique role of cooperatives in helping members through the current economic adjustments."

This was a theme Blaine echoed as well, contending that credit unions have members who are interested in supporting and investing in their credit unions–if they were allowed to do so. "This was and is the credit union model," Blaine said. "We back our credit unions, and if we do well, we get a dividend and if we don't, our money is at risk. Let us have the same tools all other cooperatives have the world over."

Hovering in the background is the charter change issue. Increased access to capital is the leading reason credit union leaderships say they want to convert their institutions to mutual banks, and charter change consultant Alan Theriault argued that charter change is a real solution to the CU capital pinch.

"Credit unions already have an option for alternative capital–in place since H.R. 1151," Theriault, CEO of CU Financial Services, wrote in an e-mail. "It is conversion to a thrift. Congress recognized H.R. 1151 put limits on credit union capital and provided an escape route from the CU charter. The reasons credit union executives have 'hands tied behind [their] backs,' to quote Blaine, is because of NCUA's anticonversion posturing and Blaine's missionary, anticonversion group. They are putting credit unions in the capital crunch."

Theriault argued that CU members, investors, the Federal Reserve and Congress would never accept alternative capital means for credit unions and that "working on a formula to turn sand to gold might yield better returns. If the group wants to get capital relief for credit unions, it should focus on removing conversion road blocks imposed by NCUA."

Theriault also charged that Blaine was raising the alternative capital agenda again because his CU needed it, a charge Blaine flatly denied. "We are having one of our most successful years in a while," Blaine said, a fact NCUA's data backs up as it showed State Employees' made more than $64 million in the first half of 2008.

–dmorrison@cutimes.com