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Alternative Capital for U.S. Credit Unions? A Review and Extension of Evidence Regarding Public Policy

Limitations on U.S. credit union capital formation powers raise questions about why these financial institutions are so restricted, and whether credit union members and the general public would be better served if U.S. credit unions had access to more capital formation options.

Executive Summary

For some time we could not quite determine why credit unions needed alternative sources of capital. Academics, consultants, credit union executives, and economists will likely tell you credit unions are “overcapitalized.” So if credit unions have more than enough capital, why do they need to find alternative sources of capital? Then we thought about squirrels. 

The reason squirrels are collecting so many acorns is similar to why credit unions are collecting so much capital: Each group has only one source of sustenance. For squirrels it is the oak tree, and for credit unions it is retained earnings. Psychologists refer to this type of behavior as hoarding, and while it is not a common human behavior, hoarding is a common response to fear, whether fear of danger or the simple fear of a shortage of some good. Therefore, with alternative sources of capital, credit unions may be paradoxically more efficient with their precious capital.

What is the research about?

Professor Robert Hoel explores three fundamental research questions in this report:

  • Is it in the public interest to permit U.S credit unions greater access to alternative capital sources?
  • Can credit unions use alternative capital to expand their capital bases in a way that will not dilute their cooperative ownership, values, and governance structure?
  • If so, what alternative capital mechanisms would be most appropriate and feasible?

What are the credit union implications?

One of the most extraordinary issues related to this topic is the dearth of capital formation tools at the disposal of most U.S. credit unions. Cooperatives and credit unions around the world have figured out how to access alternative forms of capital without diluting the core ownership structure of their organization. Additionally, investor-owned financial services firms have seemingly unlimited options and access to capital. This puts U.S. credit unions at a potential disadvantage because they operate in an environment where financial services consumers are demanding more delivery channels, higher levels of service, and more product choices.

Since most credit unions reading this report do not have access to alternative sources of capital, one of the most practical things you can do with this document is educate yourself and policymakers about the how, why, when, and what of alternative capital issues. This report certainly covers these issues in great detail.