Alternative capital, alternative future?
The easy answer(s) to that question is(are) yes, because should alternative, or secondary, capital become part of the future of U.S. credit unions, it will most certainly play some role in creating alternatives. But we're past the easy round on "Cash Cab," and the four simple words pose some questions that could vex credit unions well into their second century in this country.
At the crux of everything: just what does that "alternative" future entail?
Much like the member business loan cap credit unions swallowed to get HR 1151 passed more than a decade ago, alternative capital is one of those issues that may turn out to be a short-term fix with some real long-term ramifications. Even if your credit union exists in some sort of economic market bubble in which members are employed, housing values are appreciating, and the collections department is filling its time organizing the holiday party, you certainly have read an article or two about the problems other credit unions are experiencing. Red ink has been flowing like champagne in the Yankees' locker room, credit unions have just seen their second "special assessment," and while loan growth has been fairly strong, 0% dividends have done nothing to discourage members from continuing to bring in deposits.
The latter has created a scenario in which some CU management teams are mulling a new policy: "Substantial penalty for early deposit." All of that has strained capital in ways never even imagined just a few short years ago when some analysts were publicly stating credit unions were "over capitalized."
Coming Together on a Plan
For seemingly as long as I can remember there has been someone pushing for alternative capital, yet for something also known as secondary capital it was seldom that high on any Top 10 List. The National Association of State Credit Union Supervisors (NASCUS) has been a perennial supporter, and on this issue, perennially lonely, too. Recently CUNA and NAFCU have backed separate plans for alternative capital and realizing they needed, well, an alternative before taking the plan to NCUA and Congress, CUNA said the two groups had hammered out differences before NAFCU responded, "Not so fast, my friend."
That led to an announcement last week by CUNA in which it hedged its position by stating, "It is our understanding that we have reached an agreement with NAFCU on a proposal." We'll see. For now, the points of general agreement are that credit unions should be able to accept and count as capital funding sources that would include credit union members, sponsor groups and SEGs, and any assistance provided to CUs by NCUA under Section 208 of the FCU Act. At press time last week, the two trade groups were saying that they also had agreed additional capital would not be federally insured and could pay a higher return to members, and that additional capital would be subordinated to other claims against a credit union and the National Credit Union Share Insurance Fund.
If NASCUS and NCUA get on board, the plan would then go on to Congress. You may have heard the "devil is in the details," and that's always true with anything involving Congress. But on this issue it may well be that one little detail is the devil-the nation's cooperative financials are looking outside the cooperative to resolve a challenge, and a century of mutual self-help, pulling-themselves-up-by-their-own-bootstraps history will come to an end.
As Chip Filson, CEO of Callahan & Associates, observed in a column of his own, "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?"
Make Sure You're Involved
This is one debate in which you need to make sure you're involved. Look beyond this year's financials and projections for the next at what such a fundamental change might mean. NAFCU deserves credit for having kept a light on the very essence of credit unions, with CEO Fred Becker noting last week that "...mutuality must be retained."
Certainly the assurances that any plan will prohibit any investors providing secondary capital from having voting rights are a good thing. And yet, when you let the camel's nose under the tent, it's often only a matter of time before, well... It's imperative that secondary capital not put the needs of members secondary to anything else.
Does all of this mean alternative capital is the first step on the road to ruin? It does not. But it does mean you have no alternative but to give it the long-term forecast treatment and make sure you have conversations now that head off conversations later that begin, "You know, back then, I wish we had..."
Enter the Frankies!
Have you done something creative and effective to tell your credit union's story this year? What about the credit union story in general? Have you put the difference in "differentiation?" If so, heed the call for entries for this year's Frankie Awards.
The Frankies recognize CUs that most effectively convey what a credit union is all about and why it should matter to members and non-members alike. Previous winners have shown budgets and asset sizes don't matter. And here's the best part — it's free and easy to enter.
Just e-mail me at firstname.lastname@example.org with a brief explanation and any support materials of what you've done to tell your story.