The credit union system lacks an appropriate mechanism for dealing with problem institutions. In the for-profit financial sector, poor performance often results in a merger or take-over by another institution replacing management and the Board of the underperforming one. The credit union system often allows members to suffer years of poor service and falling asset quality. The cost to the credit union system in terms of image and lost capital is significant.
We all know credit unions in our own area that have poor member service. These credit unions, frequently with double digit capital levels, are not likely to merge or change. Every business needs a process for culling the poor performers. We don't have a process. In fact the credit union process of waiting for regulatory pressure or action may lead to bigger and more frequent problems.
The NCUA and various state regulators have risk based exams that take place about every 18 months. They receive call reports every three months. With insurance losses now reaching over $200 million and estimates of more to come, reliance on the regulatory process is not a sufficient response to underperformance.
Members do not control the operation of the credit union. They rarely vote to elect Board members—most of the Board is appointed and runs without opposition. Members have no financial ownership of the credit union. They frequently perceive themselves to have the same relationship as customers have with a bank. Members most often vote with their feet. If the credit union is not meeting their needs, they move their account someplace else. Members need to be given greater incentives to pay attention to what the Board and management are doing.
Credit unions have a lot of capital. This leads to a false sense of security. High levels of capital have the effect of extending how long management and the Board can hold on before they have to change. The returns on capital in many cases are quite poor. If member's ownership was more tangible then there would be more pressure to improve service and performance.
The quality of member service is a leading indicator of credit union health and financial performance. It is a better indicator than some of the CAMEL ratios. Examiners rarely comment on member service in their examinations. It should be considered in evaluating the soundness of a credit union because unhappy members almost always correlate with financial under-performance.
The NCUA and state regulators often lack the skills or experience to assess performance not readily measured in purely financial ratios.
The long process to move an underperforming credit union to resolution is harmful to both the members and the credit union system. When credit unions do get into trouble the regulatory process often seems ill equipped to develop plans that protect the best interests of members and the insurance fund.
The Credit Union Membership Access Act (CUMMA) passed in 1998 mandated prompt corrective action to prevent failures. This system of capital level “tripwires,” called prompt corrective action, was to prevent failure prior to capital being completely used up. The theory obviously fails to work in practice.
So the challenge remains—how do members in a cooperative system hold each other accountable for responsible use of assets, short of regulatory intervention. For “failure” starts long before a regulator might cite true safety and soundness conditions.
Can credit unions develop a system from the members' perspective that would provide a rating that could be used to compare different credit union's performance?