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CU System
Filene report Allow CUs access to alternative capital
MADISON, Wis. (1/3/08)--It is in the public interest to permit U.S credit unions greater access to alternative capital sources, says a recent Filene Research Institute report. In “Alternative Capital for U.S. Credit Unions? A Review and Extension of Evidence Regarding Public Policy Reform” author Robert F. Hoel explores the reasons why credit unions need alternative sources of capital, even though many credit union executives and economists believe credit unions are “overcapitalized.” Currently credit unions have only one source of capital--or sustenance--Hoel explains, and that is retained earnings. So credit unions tend to hoard retained earnings out of fear of a shortage. With alternative sources of capital, credit unions may be more efficient with their capital, Hoel said. After reviewing existing literature in the fields of credit unions, capital formation and public policy, Hoel provides other key research conclusions:
* Though many credit unions may not seek alternative capital now, having the power to do so would allow them to conduct business with confidence that they could build capital in a variety of ways beyond the slow retained-earnings approach, if necessary. * Federal and state laws and regulations should be amended to permit credit unions to obtain alternative capital. * Credit unions can expand their capital bases by using alternative capital in ways that will not dilute their cooperative ownership, value and governance structure. * Several different mechanisms for raising alternative capital are appropriate and feasible. Among them are obtaining capital from outside investors and acquiring special long-term deposits from credit union members. * A broad menu of alternative capital options would best serve credit unions, their members and the general public. There is no single method that is best for all credit unions seeking alternative capital. * It would be appropriate for credit union regulators to review and approve a credit union’s alternative capital plans and mechanisms prior to its issuance of alternative capital instruments. * Steps should be taken promptly to repeal or reform statutes and regulations that prohibit credit unions from obtaining alternative capital. There are no compelling reasons to delay.
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