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Managing Credit Union Capital: Subordinated Debt, Uninsured Deposits, and Other Secondary Sources

 This report summarizes discussion at a colloquium convened to examine issues of managing credit union capital: subordinated debt, uninsured deposits, other secondary sources, and adjustment of some prompt corrective action (PCA) requirements that have had unintended consequences.

Executive Summary

The sessions begin with a look at capital in its broadest context, scrutinizing how other cooperatives raise capital, and how that affects ownership and governance. The discussion then focuses on how legislation might help address credit union concerns over capital; a report on how members might respond to offers of uninsured shares paying a higher rate than insured shares; a look at how subordinated debt might be counted as capital under existing law; and finally an outline of a specific product designed to help meet capital needs.

What is the research about?

  • The first session addresses the methods through which cooperatives in a variety of business segments meet their capital needs.
  • The second session focuses explored the avenues available to credit unions to access new forms of capital, through changes in legislation and regulation. 
  • The third session reports on research designed to determine how members would react to uninsured accounts given information on rates of return, safety and soundness. 
  • The fourth session address the current and potential avenues available to credit unions to access capital through subordinated debt instruments. 
  • The final session discusses a mechanism through which credit unions can access secondary capital through subordinated debt, the rates they are likely to pay, and the details involved in making secondary capital a reality.

What are the credit union implications?

Some key findings from the reports include:

  • Current law would allow regulators to change credit union risk-based net worth requirements, thereby permitting them to invest in subordinated debt, to some extent. With certain legislative changes and regulator enabling rules, a secondary capital note currently being offered to low income credit unions could be made available to all credit unions.
  • Research indicates that members may be open to investing in uninsured savings products that return higher rates of interest than NCUSIF-insured accounts.
  • Cooperative structure in a number of industries, including agriculture, finance, insurance and exchanges, is being examined and modified to meet the changing needs of the market and members.

This report is sponsored by the McIntire School of Commerce; the Center for Credit Union Research at the University of Wisconsin-Madison.