State regulators and forward-thinking credit unions believe there is a compelling need for alternative capital. However, as the GAO study said, there were no models to study. The GAO report energized the NASCUS Alternative Capital Task Force. The Task Force was on a mission. State regulators and credit unions both believe that access to alternative capital is important to the future of credit unions. It both strengthens a credit union’s capital base and enables credit unions to continue meeting the financial needs of members.

After months of study, discussion and collaboration, the NASCUS Task Force released its white paper in July titled, “Alternative Capital for Credit Unions … Why Not?” The paper details three alternative capital instruments. The instruments discussed in the paper are designed specifically to preserve the not-for-profit, mutual, member-owned and cooperative structure of credit unions. In addition, the models are structured to retain the federal income tax exemption that credit unions have historically enjoyed.

Alternative capital remains an important part of providing regulatory relief to credit unions. NASCUS highlighted this as an issue in testimony to the House Subcommittee on Financial Institutions and Consumer Credit during two hearings this year in June and September. At the September hearing last month on H.R. 3505, the Regulatory Relief Act of 2005, NASCUS explained that capital reform is a critical concern for the nation’s credit unions. We further shared that regulatory relief must include capital reform that amends the definition of retained earnings in the Federal Credit Union Act. NASCUS cited several reasons for this in its testimony.

First, it cures the unintended consequences for credit unions of the Financial Accounting Standards Board (FASB) business combination rules. This has become an important issue for many and legislation has passed in the House to fix the definition of retained earnings in a limited way.

Beyond this, state regulators and credit unions understand that even with the lower leverage ratio and risk-based capital as proposed in H.R. 2317, CURIA, some state-chartered credit unions may not be able to rely solely on retained earnings to meet the capital base required by PCA standards.

As a part of our testimony, we asked the members of the Subcommittee to review the NASCUS white paper.

Jerrie Lattimore, regulator chairman of the Alternative Capital Task Force and Administrator of the Credit Union Division for the North Carolina Commerce Department has explained that alternative capital is essential and can serve as a cushion for potential insurance losses.

She further states, “Currently, credit unions are bound by the limited definition of net worth in the Federal Credit Union Act, which allows solely retained earnings. Further, this definition does not completely comply with GAAP and is too restrictive for growth.”

Alternative capital continues to be an important topic for NASCUS regulators and credit union members. As such, alternative capital for credit unions will continue to be a NASCUS priority in the coming year. The white paper has been distributed to the credit union community and to members of Congress. We ask that the credit union community study and consider the models presented. We look forward to continuing discussion on this topic and making alternative capital a reality for credit unions.