LAS VEGAS (7/21/10)--Credit unions worldwide are struggling to generate sufficient capital from retained earnings. During The 1 Credit Union Conference in Las Vegas last week, an international panel discussed how credit unions in Canada and Australia successfully raised alternative capital without impinging on their mutual structures. In British Columbia, equity shares were introduced in 1982, said Philip Moore, general manager, Greater Vancouver Community CU, British Columbia. Patronage shares and investment shares are treated as Tier 1 capital as long as the credit unions' rules limit encashment in any one year to less than 10% of the aggregate amount. System capital in British Columbia is allowed to include 50% of pro-rata shares of retained earnings at their central, and credit unions can use equity shares to supplement retained earnings. "This has led to some aggressiveness and prompted the regulator to require at least one-third of regular capital to be retained earnings," Moore said. In Australia, credit unions raised alternative capital as subordinated debt from institutional investors, while ensuring protection of their mutual status, according to Dave Taylor, CEO of SGE CU Ltd., Australia. Taylor described the first aggregated mutual capital issuance by 21 Australian credit unions in 2006. By working jointly, they accessed A$100 million (US$86.9 million) in capital through special vehicles in two tiers. Investors have no say in credit union governance. The Australian credit unions achieved a higher credit rating due to their collective strength and built market credibility. Implementation challenges included satisfying regulators, legal and tax structures of the special vehicles, ongoing licensing and management of the vehicles, and rating by Standard & Poor's. "These require strong trust and cooperation," and high levels of management and board expertise, Taylor said. Alternative capital can help maintain sustainable business, but is not a solution for underperformers, inadequate profitability and poor business models. Jim Updike, CEO, Honda FCU, Torrance, Calif., noted that he is "chagrined that the U.S. is so far behind in addressing capital." Credit unions' capital requirements at 7% to be well-capitalized are 200 basis points above banks' 5%. He noted three policy principles for alternative capital:
* Preserve the cooperative mutual credit union model; * Have robust investor safeguards; and * Maintain prudential safety and soundness.
"Alternative capital has proved its utility in other highly developed credit union movements," said Ralph Swoboda, moderator and principal, The ProCon Group. Done properly, they could constitute a viable capital source in the U.S., too. Swoboda pointed out that a change in federal law will be required whether capital is raised from members or from institutional investors. He also noted two other sets of issues:
* Compliance and distribution costs need to be considered, and * Rates paid on alternative capital should relate to risk.
"Setting up a facility to collectively raise capital from individual members is one alternative, while paying patronage dividends as equity share is another. But raising alternative capital requires a disciplined business and financial approach," he said. Earlier in the week, Credit Union National Association (CUNA) President/CEO Bill Cheney also addressed the subject of credit union alternative capital during the opening general session of The 1 Credit Union Conference. Cheney noted capital reform as one of the big challenges facing credit unions today. "We've seen very little growth in market share during the past 20 years and capital is a major constraint," Cheney said. "To remedy that, capital reform will have to be one of our top priorities. We have to be able to define our own future." The conference was presented by CUNA and the World Council of Credit Unions.