The credit union charter provides the most powerful counter-cyclical financial model in America today. Counter-cyclical means the ability to operate contrary to market trends or traditional business strategy. That is why credit cooperatives were formed.
At the individual credit union, counter-cyclical means that even when the sponsor closes its doors, lays off the work force, or sells a plant, the credit union, with its cooperative resources, can still serve members. When members face unexpected hardship or reduction in working hours, credit unions can and will modify terms to meet the spirit, rather than the letter, of the loan agreement. Credit unions are in the market, but can operate independently of purely market-driven outcomes.
This capability is critical in the current economic downturn, which has affected every one of our society’s institutions. The crisis started with lending, and the most urgent public policy priority is devoting billions to restore normalcy in all credit markets. Yet, during the past 18 to 24 months, in which many traditional retail and wholesale lending options have become doubtful, if not shut down, credit unions recorded some of the best lending results in our history. Credit unions have doubled their share of mortgage originations in the last 24 months, today make one in four auto loans, and are becoming the lenders of choice at colleges and universities around the country.
Why? Because cooperatives in their capital structure, member ownership, and singular business focus can operate with results that for-profit firms cannot. Credit unions can use capital, retained in good times, to subsidize member needs during difficult periods.
Credit unions throughout the country in the first quarter are seeing record share inflows – “the highest monthly volumes in our history,” as one CEO reported. Why? One factor is that consumers are looking for options as major banks, such as WAMU and Wachovia, are merged. Consumers want an institution that is local, theirs, and trustworthy.
In addition, credit unions are seeing record mortgage volume driven largely, but not solely, from refinancing due to the lowest 30-year mortgage rates ever. Why? First, some of the major originators of retail mortgages are out of business (Countrywide) and others are dealing with their workouts from problem portfolios. Another factor described in a recent business article is that banks are reluctant to extend the full benefit of lower rates directly to consumers, because they must maximize their gains-on-sale in order to rebuild their earnings and capital.
Credit unions, as counter-cyclical institutions, have every incentive to provide the maximum possible benefit to the member, effectively making every refinancing a mini-member stimulus package. Consequently, volume is soaring. One example: BECU in Seattle expects to double in the first six months of 2009 the highest mortgage volume it has ever produced in a full year’s operation!
A Stick in the Spokes of the Cooperative Wheel
Counter-cyclical strategy is extremely powerful. In essence, credit unions are experiencing one gigantic “blue ocean” of opportunity because traditional players have exited or cannot compete as they would in normal times. Moreover, these are exactly the conditions for which Congress charted cooperatives and gave them a tax exemption.
Of course, credit unions are not immune from either member difficulties or systemic problems, as shown by the corporate credit union investment difficulties. But an approach using collective resources and patient resolution can work the same at the system level as it does at the individual credit union level.
The most powerful antidote for economic and financial problems, for credit unions individually and collectively, is the extraordinary earnings opportunity provided by counter-cyclical lending and share growth. Credit unions cannot raise outside capital; they must earn it. The best time to harvest and grow is when everyone else cannot. That is the case today, as has been demonstrated by credit union results through 2007 and 2008 as the crisis grew. And it was demonstrated as well in 1982-‘87 as both the banking and S&Ls entered the worst period of their history, until present events.
Unfortunately NCUA’s activity has gone from one regulatory extreme to the other. In the early stages of the corporate crisis, NCUA was missing in action, rightly or wrongly repeating the analysis and assurances provided by the corporates they supervised. At some point in the last six months, the agency has gone to the opposite extreme, deciding that they must “take control” and restructure the corporate network in the agency’s image.
The corporate problems are systemic and will entail losses in the billions. NCUA's failure is not about whether they were sleeping at the switch, but rather their policy solution that forces the whole movement into a “pro-cyclical” instead of a counter-cyclical financial position. Instead of developing options using the collaborative resources and future earnings power so recently demonstrated, NCUA has decreed that all of the expenses must be estimated, booked, and written off literally within weeks or months as they continue to announce their updated analysis.
The current level of write-offs, in insurance expenses and capital losses, are over $10 billion, though the agency promises to assess more if the industry does not continue to provide funding for the corporates the agency now manages. This upfront expensing of unknowable future losses will reduce lending in thousands of credit unions as well as constrain their share growth. Millions of members needing billions of loans will not have this option available because of the decline of capital ratios and unplanned expenses.
The solution mandated by NCUA undermines the critically important counter-cyclical financial and public policy roles credit unions were designed to play.
As an alternative, if credit unions were to grow at 8% per year for 2009 and the next five years and pay a premium of 10 to 20 basis points of insured savings, then that minor operating expense for each credit union would generate from $4.8 billion to $9.7 billion in NCUSIF income all by itself. When combined with fund earnings and from the spread income on the “troubled assets,” hundreds of millions if not billions more in collective capital would be available as well. This expense contingency is one all credit unions could plan for and more easily afford without restricting current operations.
What's To Be Done?
The energy generated by the corporate conservatorships and credit unions' desire to continue meeting member needs has left many managers and boards resigned, adrift, or desperate. We believe the solution to regaining counter-cyclical momentum is to use the very essence of what makes credit unions successful—collective action.
Callahan's, after discussions with numerous credit unions, has designed and launched a new web site for the movement called Credit Unions Rising.
The objective of the site is to amplify each credit union’s voice about the future design of the credit union model in three ways:
Present education, analysis, and data information about critical issues affecting all system participants and the system’s future architecture. While the spotlight is on corporates for the next 6 to 12 months, decisions about the corporate system will affect every organization. Site information will be provided by both Callahan's and those who choose to participate.
Discuss action options among peers as well as all who have a stake in the system, that is, regulators, trade associations, the press, Congress, other credit unions, and the corporates. Instant messaging capability via email will be available.
Support of site content as well as special actions that participants may wish to see happen via pleges.
Natural person credit unions hold the ultimate power in the multi-tiered credit union system. While all other organizations have important roles and capabilities, without natural person success and support, no entity, not even a regulator, will thrive.
The nation’s economic crisis will require transformations resulting from governmental actions, not to mention new market realities. To influence these changes, credit unions must use the very capabilities, albeit in a new form, that were the source of every credit union’s founding. Committed individuals must join together to inform and learn from each other, speak with common purpose, and act to influence the direction of critical events.
Cooperative action is every credit union’s “key success factor” and also the means by which every corporate, CUSO, trade association, and even credit vendor has been able to succeed as part of the movement. Joining together is also the way to transform the formal powers of regulators into collaborative solutions.