Two Top CU CEOs Concerned Secondary Capital will Dilute CUs' Distinctions; Argue Risk-Based Capital is the Way to Go

WASHINGTON-Even though two CEOs of large credit unions agree that the credit union community should be discussing the possibilities for secondary capital among credit unions, both say they cannot foresee an alternative capital solution that fits with credit union philosophies. “It is a great debate the industry should be having,” American Airlines Federal Credit Union CEO John Tippets advocated. However, he also stated that he would oppose any legislation to allow credit unions to seek alternative capital because he feels that no form can fit neatly into credit unions’ principles. Congressman Brad Sherman (R-Calif.) has said he plans to introduce a bill this congressional session. Tippets also said he felt he received reinforcing feedback after he debated State Employees Credit Union CEO Jim Blaine, a limited alternative capital supporter, in a trade publication in the fall of 2002. Navy Federal Credit Union CEO Brian McDonnell was not quite as opposed to alternative forms of capital for credit unions. “If a true formula can be developed which can meet all those objections, then I would be in favor of secondary capital,” he said. But those objections are strict. First, McDonnell said, his main objection to credit union involvement in the market is “worrying about credit unions’ distinctions.” He added that discussion is necessary and that he welcomed it, especially when looking at changing one of those key distinctions. Tippets agreed that maintaining the characteristics that distinguish credit unions from banks is crucial. What makes credit unions successful is their cooperative, not-for-profit, member-owned structure and their unique philosophy of helping the underserved, which distinguishes them from their competitors. One of the strongest points is that credit unions do not have access to capital markets, which “resonates particularly with our friends on Capitol Hill.” Removing that would be like “pulling one leg out of a four-legged chair,” he said. On the practical side, withholding voting rights from secondary capital lenders, as some have suggested in issuing subordinated debt, and establishing permanency to satisfy net worth requirements may not be “real world,” McDonnell said. An investor would likely want to have a say in how the credit union is run. “From a practical standpoint, I don’t see that easily solved.” “I’ve been across the table from wonderful lenders and they’re not dumb,” Tippets said. It may not happen immediately, but over time they are going to want their seat at the table. Additionally, McDonnell said if alternative capital is offered to non-members that could compromise credit unions’ cooperative nature and jeopardize their tax-exempt status. Both CEOs also pointed out that the cost of raising secondary capital is relatively high. Tippets suggested that some credit unions’ capital issues can be solved within the retained earnings model using cost control, adjusting pricing, and controlling growth. He acknowledged that credit unions may not want to do these things, but it is a business decision that sometimes has to be made. “When we want to attract capital, we do things that are attractive to our membership,” McDonnell said. Right now Navy Federal is offering certificates at 5% for a $20,000 investment. He added credit unions can look at the asset side of their balance sheet to sell off their mortgages or credit card portfolios. He made the point that he does not foresee Navy Federal seeking secondary capital. Just obtaining the right for credit unions to use secondary capital for those that want to use it is another sticking point for Tippets. “My problem is that we share a common brand,” he said and it should be protected because that is part of the brand. “The risk based capital concept now getting a lot of attention is a right and better model,” Tippets said. It is consistent with credit union principles and makes sense economically, he explained. “Certain credit unions appear to have a need,” McDonnell admitted, “but a lot of it could be provided by the risk-based [capital] component.” He recommended that credit unions wait and see if it solves their capital problems in the near term. “It’s something we can all come together on, something we should all come together on,” he said. McDonnell indicated Assistant Treasury Secretary for Financial Institutions Wayne Abernathy’s interest in it. Though he would never recommend that a credit union switch to a bank charter, Tippets said, aside from the risk-based capital solution, if credit unions want different options, they should convert to banks. [email protected]