The credit union system has an unprecedented track record of developing and delivering a broad and deep array of valuable financial services to their members. But today’s limited and narrowly defined capital regulations are stifling one of the best consumer value-generating groups in the U.S. Like other mature financial services institutions, credit unions should have broader ways for managing capital.
We can encourage modernization of credit union capital regulations by responding to the NCUA’s recently issued Advanced Notice of Proposed Rulemaking (ANPR). This ANPR seeks comments on alternative forms of capital for federally insured credit unions. CUNA Mutual Group commends the NCUA for issuing the ANPR. We look forward to submitting our comments and encourage others to weigh in on this important topic.
Modernizing capital regulations to provide credit unions robust and diverse ways to manage their capital, while adhering to cooperative principles, would bring significant benefits. These include:
Promote investment, innovation and improved efficiencies
In just the last few decades, the proliferation of channels that members can use to connect with their credit union has been astounding. They have expanded from brick and mortar to touch-tone tellers, ATMs, home banking, mobile banking, video teller machines and we are now delving into artificial intelligence. Products and services have evolved to include checking accounts, mortgage lending, business lending, investments and insurance. These advancements have a cost, however, and credit unions shouldn’t be limited in funding them purely out of retained earnings. Competition is requiring higher levels of investment and innovation. Alternative capital can help fund investments in innovations and improve efficiencies and increasing member value.
Reduce risks within the system and a market-driven risk assessment
If structured properly, both debt and equity capital instruments can increase a credit union’s loss-absorbing capacity without impairing its cooperative nature. Alternative capital raised outside the system that is less apt to claims against the National Credit Union Share Insurance Fund fortifies the loss-absorbing capability of both the issuing credit union and the NCUSIF. Given the NCUSIF is cooperatively owned, outside capital would also act as an addition loss buffer. In addition, the price a diverse set of sophisticated investors is willing to accept for a credit union’s alternative capital instruments would give the NCUA a second view/indication of what the investors sees as the institutional level risk, with all else being equal.
Provide another tool in the formation of de novo institutions and help prevent bank conversions
Limited access to capital is often cited as the biggest challenge in forming a new credit union. Today, this literally requires a large gift or significant subsidies from a sponsoring institution or special employee group. Interestingly, limited access to capital is also the common reason why some credit unions have sought or converted to a bank charter.
Provide more sustainable asset growth
Unlike banks and other cooperative financial institutions across the world, credit unions can only grow their capital through net income. This unique and narrow restriction limits the rate credit unions can grow sustainably, to a rate equal to their return on equity. Growing assets below its ROE will build capital, while growing assets at a rate above its ROE will erode capital. For example, if a credit union has a 7% ROE, it can grow its assets by 7% or less without negatively impacting its capital position. Giving credit unions the ability to issue and retire capital, just like banks and other cooperative financial institutions, will provide another lever to manage growth outside of earnings.
According to CB Insights, a venture capital database, more than $23 billion of capital flowed into financial technology startups in 2016 alone. In addition, the FDIC quarterly banking profile currently shows more than $87 billion in subordinated debt currently resides on the books of U.S. banks. Imagine the value and growth for consumers and credit unions if just a portion of this capital could be deployed through credit unions!
CUNA Mutual Group has expertise in issuing and investing in secondary capital in the financial cooperative world. We’ve helped more than 20 Australian credit unions raise $100 million (Australian dollars) in subordinated debt, invested in secondary capital notes issued by low-Income designated credit unions here in the U.S., and raised $75 million in surplus notes for our own balance sheet. In each case the proceeds of the capital helped in funding innovation and growth.
Alternative capital sources would provide immense benefits to the credit union system, and CUNA Mutual Group stands ready to help. We look forward to participating in the ANPR and encourage others to participate as well. For more information on the ANPR process, go to
Theran Colwell is vice president of lending loan growth for CUNA Mutual Group, the marketing name for CUNA Mutual Holding Company, Madison, Wis. Contact him at
