Investing in the Future of Credit Unions: A New Funding Initiative

Introduction

Since federal share insurance was introduced for credit unions in 1971, a major challenge has been securing the capital needed to ensure the sustainable operation of new credit unions. This challenge has contributed to a dramatic decline in the number of new credit unions, from thousands annually in the 1960s to fewer than ten per year in recent decades. To address this, groups aiming to launch new credit unions have had to raise substantial funds, typically over $1 million, to secure charter and insurance approvals.

A New Funding Source

CUCollaborate proposes a novel solution to this problem by creating a fund dedicated to supporting the launch of new credit unions. This fund would operate, as a non-profit CDFI loan fund completely independent of CUCollaborate. The fund’s board would include stakeholders such as representatives from recent new credit unions, supportive credit unions, trade associations, and CUCollaborate personnel with expertise in chartering new credit unions.

How the Fund Works

1. Donations and Investments: The fund would receive donations from a variety of sources, including credit unions, foundations, and vendors interested in strengthening the credit union movement. Additionally, CUCollaborate requires donations from client credit unions involved in mergers, contributing a fraction of the pre-merger assets of the acquired credit union to the fund. This way, while mergers reduce the number of charters, they would help to fund new ones in underserved areas.

2. Subordinated Debt: The fund would primarily invest its capital in subordinated debt issued by new, low-income designated credit unions. This debt would substitute for donated capital and provide a cushion for new credit unions, enabling them to handle startup costs and attract deposits while maintaining necessary capital ratios.

3. Operational Costs and Returns: Over time, the fund would cover its operational costs through interest payments on the subordinated debt. Any surplus interest could be reinvested to support additional new credit unions.

Impact on New Credit Union Formation

The availability of a stable source of subordinated debt would streamline and finance the process of forming new credit unions. Potential funders would no longer need to vet new credit union initiatives themselves but could rely on the fund’s expertise. For those launching new credit unions, this fund would provide a crucial new capital source. But most importantly, donations to

the Fund would be tax deductible and a donation could be used to charter multiple credit unions rather than just one.

Simplified Examples

· Without Subordinated Debt: A group raising $2 million in capital donations would spend $1 million on startup costs in the first three years, allowing the credit union to accommodate $10 million in deposits. This model, however, benefits only one new credit union per donation.

· With Subordinated Debt: A new credit union could receive $2 million in subordinated debt from the fund. The credit union would use $1 million for startup costs, safely accommodating $10 million in deposits. If the credit union experienced startup losses, the fund would bear the losses but could recover a substantial fraction of its investment as the credit union generated positive net earnings and repaid the debt.

Long-Term Benefits

As the fund matures, it will benefit from external donations and debt repayments from successful new credit unions. This model ensures that successful credit unions return capital to the fund, supporting the next generation of new credit unions. Over time, the fund’s diversified investments in multiple new credit unions will create a sustainable cycle of growth and development ensuring a larger and larger number of credit unions are chartered each year.

Conclusion

By leveraging subordinated debt and a broad base of donations, CUCollaborate's proposed fund offers a viable solution to the longstanding challenge of capitalizing new credit unions. This initiative promises to revitalize the credit union landscape, fostering the birth of new credit unions and expanding financial services to underserved communities. Want to learn more? Contact us!

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