Mar 01 2006

Secondary Capital Products: An Assessment of Member Interest

Report  
Number  
116

Capital is the lifeblood of credit unions. It’s the critical measure of the organization’s financial strength and vitality. Credit union members could be a source of capital through the purchase of long-term certificates of deposit (CDs).

Kyoung-Nan Kwon
Michigan State University
Jinkook Lee
Ohio State University
Report Number 116

Executive Summary

Capital is the lifeblood of credit unions. It is the critical measure of the organization’s financial strength and its financial vitality and reliability. Capital provides a financial and psychological cushion during hard times and is also an enabler of growth and enhanced service during good times. Maintaining sufficient capital for any financial institution is a tightrope dance between the regulatory demands of safety and soundness and the fiduciary responsibility to return value to member owners. Determining an appropriate capital position is one of the most important decisions a financial institution will make.

What is the research about?

This study examines member interest in secondary capital products for credit unions, specifically a long-term certificate of deposit (CD). Because CDs are widely offered by depository institutions, they’re more easily understood than other secondary capital instruments, and potentially more attractive for consumers with smaller sums to invest. To gauge member interest in such a product we ask two basic questions:

  • What product characteristics influence member interest in long-term CDs as a capital product?
  • What member characteristics influence member interest in long-term CDs as a capital product?

What are the credit union implications?

Compared to other Filene Research Institute studies, the implications of this study are not so obvious. Currently U.S. credit unions are unable to offer members a long-term certificate of deposit as a means to generate secondary capital. But don’t disregard the findings and potential future implications for your credit union. The regulatory landscape is fluid and changes to credit union capital may occur in the near future. If such changes do occur, this study could be an invaluable roadmap for your credit union’s inaugural secondary capital product.

The benefits of foresight in our rapidly changing industry are enormous. We believe being proactive and curious about the future of credit unions is a wise line of thinking. Therefore to gain more insight (and potentially foresight) into secondary capital products for your credit union, read on.