The One Thing Needful

The tool to the future success of credit unions involves only a three-word change in the Federal Credit Union Act’s definition of net worth.


Congress and the new Administration are assembling the largest economic recovery package ever. Lobbyists, manufacturing industries, state and local governments, nonprofits and interest groups from every sector of the economy are after their share of this near trillion dollar largess.

What should the credit union approach be? I believe it is very simple: give us the tools and we will continue to lead America's economic recovery. The tool involves only a three-word change in the Federal Credit Union Act’s definition of net worth.

By striking the current definition of "retained earnings balance" and replacing this with the word "capital" or "member capital" as determined under generally accepted accounting principles, the credit union model is complete.

Why focus on member capital?

For every dollar of capital an individual credit union will lend another $6-$8 dollars in loans. The most pressing need in America today is a resumption of normal credit market activity. Credit unions are proving daily that they are the most viable financial system in America.

Member capital will provide the foundation for continued leadership, enhance the reality of member-ownership, provide alternate capital models and thereby enhance future safety and soundness.

Member capital is the original core of the credit union cooperative model. Share insurance neutered the economic impact of this structure. Prior to the Credit Union Membership Access Act of 1998, alternative member capital was both a statutory and practical reality. CUMAA eliminated this historical legacy, imposed PCA and provided no tools to meet this new capital model. Now is the time to correct this structural flaw.

Today, natural person credit unions can capitalize CUSO's, corporate credit unions, the CLF, the NCUSIF, and the FHLB system; but not each other! The system has over 11% capital but often it is not in the right place at the right time and therefore cannot be mobilized for opportunity, to address economic distress, or to underwrite new charters.

How to accomplish this goal:

The time is short. The Congressional momentum is urgent. The temptation for credit union congressional strategists to ask for everything in the hope of getting something is overwhelming.

Credit unions have a documented record of successful lending and leadership in this economic downturn that Congress will respect and honor—if we continue to focus on our model. If we become another supplicant, how do we distinguish credit unions from those institutions which caused the problem?

Unity of purpose and plan is critical. NCUA and the state regulators with NASCUS must affirm the vital role of member capital. CUNA and NAFCU must have a common front. Everyone must put their individual priority second to the welfare of the whole. Large credit unions and small, financially successful and economically challenged ones must agree that a foundational change, a capstone to the cooperative model, is more important than a myriad of other pressing needs.

To assist this process, the CUSO partnership CUFLSP managed by Callahans has put together a short draft position paper providing some more background on the opportunity. Do take a few minutes to read this draft.




Jan. 26, 2009


  • This is a simple, yet effective strategy that allows for additional capital and keeps the funding within the movement. Well crafted!
    Mark Cochran
  • Do credit unions need TARP money? Or do they just want it? I have yet to see anyone anywhere articulate any real need for TARP money. I've read a lot about "competitive inequities" and that credit unions "may need some help down the road" if things get worse, but these aren't really sufficient -- at least not sufficient enough to get this taxpayer's support.
    Jeffry Pilcher
  • Chuck, under GAAP , secondary capital must be non-voting options! Yes, "pricing" would be market driven, but couldn"t you picture paying your existing members with deposits > $250,000 a somewhat higher rate if you could also count the deposit as secondary capital? Those members are in fact uninsured and are "at risk" now! As it stands now, these members often don't fully appreciate that they are "at risk" and the CU isn't "rewarding" their tremendous support. Most CUs appear to have @ 10% of their shares in uninsured accounts . Let's fully and correctly disclose to these members where they stand and give all members the chance to be appropriately rewarded for capitalizing their CU. CU's and CU members can solve CU problems without taxpayer bailouts if we're given the chance - can't we?
    jim blaine
  • In general I agree with the article and the need for secondary capital. However, I'm not sure why any secondary capital holder would not expect an additional vote and/or higher returns in exchange for their increased risk. The article seems to promote investment amongst CUs. However, the proposed FCUA change would ultimately give the industry sufficient latitude to sell secondary capital directly to CU members as an "uninsured product". No disagreement there either, I just think a distinction should be made between investments made between CUs and those made to their natural person members.
    Chuck Baldwin
  • I think Chip Filson is RIGHT ON. The change that is proposed is not only needed, but is NECESSARY. There has been talk of changing the credit union model. I don't think that is needed...I think that the proposed change to the Federal Credit Union Act would allow credit unions to meet the needs of their members and open up even more money for lending. I am supporting this proposal and will forward it to other credit union CEOs. Keep up the good work, Chip!
  • I thought the "One Thing Needful" article and accompanying .pdf file were interesting. However, I am confused about how credit unions would approach receiving the extra capital. Does the proposal advocate stronger credit unions putting member capital into weaker credit unions? Then would they receive a dividend? And a member could do the same thing? Our credit union has been losing money due to bad loans, so I am wondering what the attraction would be to others to entice them to invest in us under this circumstance. On the other hand, we did have 1.7% ROA in 2006 when loans were going well.
  • Dear Chip With all due respect, the following from your article does not describe a member owned cooperative – it describes socialism – even communism: “Everyone must put their individual priority second to the welfare of the whole. Large credit unions and small, financially successful and economically challenged ones must agree that a foundational change, a capstone to the cooperative model, is more important than a myriad of other pressing needs.” Although these failed political / economic models still have their cheerleaders, both have failed miserably and are frankly un-American. If I truly own the capital of my credit union, I do not want to see it wasted on a poor performing competitor; or recapitalizing the corporate system, which I do not even use. Now, to speak to Mr. Blaine’s notion about selling members on taking risk by investing in the capital of “their” credit union for a higher rate of return. This is what a certain banker named Keating did years ago. He went to jail. When faced with losing their money, members “investing” in “their” credit union will claim they were defrauded by management, and cry to the government for relief. Are your board members ready for this risk? Is your bonding company? Mr. Blaine, your idea is purely wishful thinking and faulty idealism, in the real world it will not fly. Same with the notion of credit union “A” investing in credit union “B”; all that does is balloon the risk to the deposit insurance fund. Please discard these approaches toward capital as mutual savings banks have done years ago; going down this road again with hurt the credibility of the entire industry. Thank you