Jan 01 2003

Capital Instruments for Credit Unions: Precedents, Issuance, and Implementation

Report  
Number  
86

This report reviews how banks use non-voting capital instruments, such as trust preferred securities (TPS) to satisfy capital rules and strengthens the case for reforming the capital rules that govern credit unions.

Jim Wilcox
Jim Wilcox
University of California-Berkeley
Report Number 86

Executive Summary

In a Filene report entitled Subordinated Debt for Credit Unions, we argued that both credit unions and public policy could be strengthened by reform of capital (net worth) rules for credit unions. The generally strong conditions of credit unions may currently obscure the genuine desirability of reforming their capital rules. At the same time, current conditions provide the opportunity to improve capital rules for credit unions, not under the duress of economic weakness or financial disruption, but, rather, when credit unions are strong, and markets are stable.

What is the research about?

This report discusses some of the mechanisms through which credit unions might issue capital instruments. The report notes the successful precedent of banks’ issuing trust preferred securities (TPS). It discusses how the combination of long maturities and of call, extension and deferral options underpins regulatory treatment of TPS as bank capital.

The report illustrates how depository institutions of various sizes can reduce their interest and issuance costs by tailoring capital instruments to fit their individual circumstances. The report also discusses how pooling the capital instruments issued by individual credit unions and adding credit enhancements would greatly expand access to financial markets and reduce capital costs of credit unions.

What are the credit union implications?

This report strengthens the case for reform of credit unions’ net worth requirements by showing the successful precedent of smaller banks’ pooling of capital instruments. That precedent suggests that about two-thirds of aggregate credit union assets are in credit unions that could reasonably expect to raise capital with either stand-alone or pooled issues of capital securities. The volumes and costs of those instruments indicate that similar instruments would be economically feasible for many credit unions.