Alternative Capital is Not the Solution

On Friday, October 9, CUNA and NAFCU announced they were in agreement on a proposal to send to NCUA. However important this option will be in the evolution of the credit union system, it is not the most important capital priority for NCUA or the credit union system.


For months, credit union leaders, NASCUS and CUNA have been trying to create a consensus that would support legislation to provide capital alternatives for credit unions. On Friday October 9, CUNA and NAFCU announced they were in agreement on a proposal to send to NCUA. However important this option will be in the evolution of the credit union system, it is not the most important capital priority for NCUA or the credit union system.

The economic trials of today have obviously generated this consensus. "This . . . gives credit unions access to additional strength to help them weather the economic downturns and other strains on their capital base" was the justification provided in CUNA's Friday press release.

There is indeed an immediate, urgent need for additional capital. The specific credit union problem cases are well known. However, right now more than $10 billion of collective capital is available, owned by credit unions, and sitting at the US Treasury, instantly liquid. It is in the NCUSIF.

The Collective Capital Fund

When the NCUSIF's structure was modified by legislation in 1984, both its financial and ownership structure were changed. The fund became a cooperative, owned by its members, the credit unions through their 1% deposit. This is both a legal and accounting fact.

Just as in a credit union, member credit unions pooled their individual 1% of insured share deposits to provide for the welfare of each other in times of need. Historical precedents abound with dozens of credit unions operating successfully today that would otherwise not have survived prior economic downturns without receiving NCUSIF assistance.

The NCUA Board in January 2009 used this same authority to deposit a capital note of $1 billion dollars on literally days' notice, according to the Agency's account, on learning about US Central's increased OTTI estimate.

The Need for Immediate Capital Assistance

By all accounts the US economy has gone through the worst economic downturn in a generation. Credit unions have been demonstrating their counter cyclical credit role by granting record levels of loans. They have fulfilled both their Congressional purpose and met member needs documenting, once again, why cooperatives are so critical to the American economy.

However, individual credit unions have not been immune from the real estate downturn and job layoffs affecting members. Over the 12 months ending June 2009, 1,480 credit unions have reduced their employee count by almost 7,000. These and other credit unions have had to shrink their assets to stay within capital limits. In this same 12 month period, 1,856 credit unions have reduced their balance sheet by $7.0 billion dollars.

These layoffs not only affect the individuals, but also their credit unions' ability to continue to meet member needs. The asset downsizing may seem small in an $ 880 billion base, but how many other credit unions have put on the brakes, discouraging both share and loan growth, for fear of dropping below a capital level?

The Need is Measurable and Manageable

At June 30, using the call report data, every credit union below 6% (adequately capitalized) net worth or between 6 and 7% (well capitalized) could raise their net worth to the next capital level with capital assistance of approximately $500 million. This is less than the amount now set aside as a loss provision in the NCUSIF at August 2009. This amount is half the sum NCUA put in US Central. That $1 billion has now been repaid through the corporate stabilization program and is sitting in the NCUSIF's Treasury account.

Using capital notes would not only prevent failures but ultimately save insurance expense. This is because many of the assisted credit unions would be able to pay back the assistance as they and the local economy recover.

But most importantly, it will allow these credit unions, large and small, numbering in the thousands, to continue to serve their members.

Putting Credit Union Efforts on the Right Option

I believe alternative member capital is a necessary option for the 21st century credit union system. A member capital account was in NCUA's Report to Congress in 1983. But it is not an immediate possibility.

Even assuming a bill could pass Congress without any unintended consequences, there is no assurance NCUA would be able to establish effective rules in a reasonable time period. One need only look at the corporate rule making process announced in January to see how extended the process can become—even in this situation of dire urgency.

Using just a fraction of credit unions' collective capital today could bring tremendous benefits to members, their credit unions and the entire soundness of the credit union system. The actions can be immediate. There need be no cumbersome rule-making process as demonstrated in the US Central example.

Re-investing the collective capital of credit unions back into the system is more than a policy, leadership, or management issue. These are necessary steps; but the issue is bigger than bureaucratic processes. For when individuals who have charge over collective resources hold them back in time of need, for whatever rationale, this becomes a moral issue.

As members and credit unions go into literal bankruptcy and collective resources withheld, we must ask what kind of cooperative system have we established? If collective funds for the system's immediate needs are going unused, why should Congress grant new options for the future? If credit unions cannot use their collective resources for each other's benefit, then how is our system any different from the for-profit models?

This is a Test of the Cooperative System

Holding back on resources is a challenge for every participant in the credit union system. During the many years of economic stability, the trades, credit unions and regulators all spoke to their common purpose to serve the members' interest. But in practice, each participant had the ability to independently define how to pursue this goal. That time is over.

This is not about one side or another being right or wrong, or having the better solution. It is whether we can put into practice the values we all claim to follow: self-help, cooperation and member focused. Working on this common purpose now could even facilitate working together for new legislation.

This test is not new; it is as old as humanity. It is described in scriptures. From the story of the loaves and fishes to the parable of the rich young ruler asking about gaining eternal life and to the ever-present question of who is my neighbor, societies have struggled with providing resources to those in need. Shakespeare also presented what is required of us now:

The Quality of Mercy

The quality of mercy is not strain'd.
It droppeth as the gentle rain from heaven
Upon the place beneath. It is twice blest:
It blesseth him that gives, and him that takes.
'Tis mightiest in the mightiest; it becomes
The throned monarch better than his crown.
His scepter shows the force of temporal power,
The attribute to awe and majesty,
Wherein doth sit the dread and fear of kings;
But mercy is above this sceptered sway;
It is enthroned in the heart of kings;
It is an attribute to God himself;
And earthly power doth then show likest God's
When mercy seasons justice.

Will we be true to our cooperative values and what changing circumstances require, or like the Merchant of Venice, insist that the formal rules govern our actions?




Oct. 12, 2009


  • I do not believe credit unions should use alternative capital to grow. At the present time a credit union cannot grow faster than retained earnings can be accumulated. This allows a profitable credit union the ability to grow. Unprofitable credit unions should not be growing. A credit union with alternative capital that fails will harm the reputation of all credit unions. The current system allows for long term sustained moderate growth. I have been in the credit union system since 1972. There has been plenty of growth in both members and assets during that time.
    Wayne Langei
  • Chip,

    You are the voice of reason in these uncertin times, We really do need to get back to the fundementals of what Credit Unions are about our common bonds and Members helping Members!
  • Your focus on the NCUSIF is interesting. Currently, CU's have sent money to NCUSIF who earns about 2.3% on those funds in goverment securities. CUs could earn, at the margin, about 3.5% if that money was left in the natural person CU system to help members with loans.

    120bps on $8.024 billion at NCUSIF is worth about $96 million more a year!
    Bill Before
  • Very moving article. I recall not too long ago Mike Fryzel, when asked about using NCUSIF funds for this purpose, said definitely not and claimed the funds were exclusively for credit union member deposit insurance even though it is indeed used for other purposes. Perhaps this hard line can be challenged to address the short term and then look at alternative capital for the long term?
  • I’m a big proponent of alternative capital, but I think Chip's right – it won’t solve today’s most pressing problem.

    Alternative Capital protects the Share Insurance Fund and helps credit unions position themselves for growth opportunities. However, it isn’t a viable solution to help a credit union who has hit some black-ice and is moving into a danger zone. Unfortunately, for these credit unions the cost would be prohibitive or the market non-existent.

    There seems to be a sweet spot for alternative capital: When you don’t need it today - but you plan to need it in the future. But it isn’t going to help those in need right now.

    However, if we don’t get alternative capital now – we may never see it. There has never been a bigger stage and momentum for reform and legislative changes to get alternative capital passed today. So if we miss the window, I don’t know when we’ll ever get the chance.

    I like your thinking ideas to use the NCUSIF to protect itself with short-term investments into credit unions in need. I think the days of NCUA using mergers at par as a solution to troubled credit unions is approaching an end. The accounting rules and more educated buyers will make this harder and harder for NCUA to find merger partners.

    Let’s hope we get action on both strategies.

    Tom Ryan
  • There are differenct types of struggling credit unions. Those with negative equity, and those with negative cash flows. A credit union with positive cash flow, or one that could be brought to a positive cash flow, could easily survive if this type measure were used, even with falling equity or liquidity. Such is the case with the Corporates. With some assistance for equity and liquidity, they will always be a good bet for positive cash flows. When a credit union, corporate or natural person, has negative cash flows, even with high net worth, it is only a matter of time.

    If credit unions were only looked at as an investment, an ongoing business, we would have far fewer disappearing, and less costs for all of us to cover.
    Bill Wade