Jan 01 2003

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

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.

We conclude that it is technically and economically feasible for credit unions to issue various kinds of capital instruments. In our 2002 Filene report, Subordinated Debt for Credit Unions, we noted the benefits to credit union regulators of capital instruments. Together, this report and our 2002 report strengthen the case for reforms that would allow credit unions to issue capital instruments.