Secondary Capital for Credit Unions

It makes a great deal of sense and would request that you look beyond Risk Based Capital and consider the advisability of uninsured Secondary Capital as a component in the Net Worth calculation for natural person credit unions. I think it is an idea that should be implemented with four limitations: 1) The total amount of Secondary Capital included in the calculation may not exceed 50% of the Retained Earnings portion of Net Worth; 2) The total amount of Secondary Capital from non-natural person sources (natural person and corporate credit unions, as well as other corporations) included in the calculation may not exceed 50% of Secondary Capital; 3) The total amount of Secondary Capital from any one individual included in the calculation may not exceed 10% of the Retained Earnings portion of Net Worth; and, 4) The Dividends paid on Secondary Capital should be limited to the credit union’s Return on Net Worth (Equity) as calculated: Net Income divided (Net Worth plus Secondary Capital). The addition of Secondary Capital to the Net Worth calculation makes sense for several reasons. Most obvious is that stock and bond market conditions have a significant impact on the intermediation of dollars to depository institutions. Even when we lower dividends to previously unthinkable levels, funds continue to roll in. While these very low dividend rates may slow deposit growth, they do not stop it. In fact, the recent depress equity markets has caused a flight to safety and the resulting excessive deposit growth has caused otherwise well-managed credit unions to face Prompt Corrective Action restrictions. Another reason that Secondary Capital makes sense will not be popular in the wake of Enron and other corporate earnings/accounting scandals, but I think is important to the long-term success of the Credit Union Industry. Credit unions often lack the ability to attract the best and brightest young talent because of the inability to offer an ownership stake in the success of the organization. During my 28 years in the business, I have noticed on several occasions that tight labor markets have made it particularly difficult to put a compensation package together that meets the needs of highly motivated, highly talented individuals, when they have the option of going into the world of stock owned banking. Giving credit unions the ability to place some portion of compensation into a Secondary Capital account will let interested individuals earn a return directly in proportion to the credit union’s financial performance. Similarly, Secondary Capital has a place in the long-term incentive compensation scheme for senior executives of a credit union. Some portion of compensation can be placed into a term Secondary Capital account, again earning a return directly in proportion to the credit union’s financial performance.