The credit union system is transforming. Some of the changes are proactive efforts for future growth. Others have been driven by external pressures. Little in the industry is standing pat, relying on the status quo.
For example, the restructuring of the corporate network has been underway for the past five years. Its changes involve not only mergers, but also the creative efforts of smaller corporates to create value through expanded services. There is also an ongoing assessment of U.S. Central's role.
In addition, far more multi-owned CUSOs are begun annually than new credit union charters issued. There are now more than 40 CUSOs offering some aspect of member business services, locally, state-wide or nationally. Five years ago, only one or two such CUSOs existed. A payroll processing service for small companies and a new student lending effort are just two of the CUSO startups this summer.
And individual credit unions are making strategic changes, including more open charters, new names and brands, innovative product structures and an ever increasing use of CUSO networks for expanded capabilities. Moreover, some credit unions have modified their governance process to enhance their boards' strategic role.
Even the trade associations, vendors serving the industry, and CUNA Mutual have undergone fundamental strategic assessment and corporate change during the past five years.
Institutional Rigor Mortis?
The one aspect of the system that has not demonstrated institutional change is NCUA. This does not mean it has not instigated process improvements or adopted newer technology. Rather the mindset or vision that drives the Agency is the same as 30 or even 40 years ago. Is it time to re-examine the Agency's purpose? Could NCUA, whose self image has been to protect the “safety and soundness” of the system, become an Achilles' heel, dragging down other credit union movement efforts at transformation?
NCUA has published its Strategic Plan for 2006-2011 on its website. Its mission, vision and three high level strategic goals are listed. The reference point for these plan components is the Federal Credit Union Act's stated purpose: An Act to establish a Federal Credit Union System, to establish a further market for securities of the United States and to make more available to people of modest means credit for provident purposes through a national system of cooperative credit, thereby helping to stabilize the credit structure of the United States.
A starting point for a new vision-mission would be to ask:
- What does making more credit available to people of modest means require?
- What does a system of cooperative credit entail?
- How does this system stabilize the credit structure of the U.S.?
The mantra that is repeated in almost all aspects of Agency activity is embedded in its Strategic Goal Number One: A safe and sound credit union system. Unfortunately, this focus and its use in the mission statement does nothing to distinguish the credit union system from that of banks or thrifts.
I believe safety and soundness has its place, but that priority was set decades before deregulation. Thirty years ago laws made mergers of troubled institutions impossible or impractical, and the primary method of dealing with failure was liquidation or a purchase and assumption with the insuring agency picking up any shortfall.
For over 15 years there has not been a major hit to a federal deposit insurance fund by any depository institution. Not only has deregulation led to elimination of some of the risk concentrations causing failure during economic downturns, but the new environment also has expanded the regulatory options for dealing with failure.
Today, safety and soundness does not mean the “crash and burn” examples of the thrift industry in the late 1980s or even the temporary insolvency of the FDIC in 1990; rather, safety and soundness today means relevance. Failure today in credit unions often means going out of business slowly, frequently with rising ratios of capital—because the institution no longer meets the needs of its members. At March 30, 2006, about three quarters of all credit unions had low or no share or member growth.
Why Reassess NCUA's Mission?
An even more practical reason for reassessing NCUA's focus is that the present focus isn't working. The Agency is not meeting its own “indicators of success” listed in its Strategic Plan.
- The first indicator of success is appropriate credit union capital levels. Today the system is overcapitalized by almost $30 billion (the amount in excess of the 7% well-capitalized level). Put another way, the system is not using its retained earnings to benefit members. One result is that individuals attracted by the surplus are encouraging charter change.
- The second indicator of success is policies and programs that enhance credit union membership, service, assets, shares and loans. Except for loans, the credit union system is at its lowest point in growth in all these categories since deregulation began in the early 1980s.
- The third indicator of success is a prudent, flexible and efficient regulatory environment. From conversations with credit unions involved with the Agency over mergers, new initiatives, filing for new charters, or even finding who can answer a question, I know of no one who would use these terms to describe their experience
- The fourth indicator is enhanced credit union market share and services. As best this can be measured, credit union market share in deposits, auto loans, credit cards and even mortgage lending has been flat or declining for the past 10 years.
So if many other parts of the credit union system are changing, is it not time for NCUA to rethink its role?
Challenging Current Assumptions
I suggest, and as is implied in some of the Agency's own language, that the Agency's primary purpose be not so much strictly safety and soundness as the continued growth and evolution of the cooperative financial option for all Americans. The agency should be asking: “What is the value of the cooperative charter? How is it different? What should members receive that is not present in for-profit alternatives?” and then driving toward the answers.
Without clearly understanding, articulating and formulating policies with such a goal in mind, the Agency will just end up imitating banking regulations and solutions.
Some Implications of Change
If there is a restatement of mission, one of the consequences could be to revolutionize our thinking about asset size. Is it the assets the institution owns (balance sheet size), or is it the access to cooperative credit through easily reached networks? If the latter, this would allow credit unions to routinely use secondary markets and not be constrained by their own resource limits.
Second, a restatement of mission would focus our efforts on who we really are rather than on merely being “industry competitors” and measuring ourselves against banker benchmarks. If the question is what is needed for credit unions to thrive, comparing ourselves to competitors only externalizes problems.
Are we really losing to competitors or to a changing environment? Many credit unions have aging staff, no volunteers, lack of enthusiasm (or feeling overwhelmed), declining relevance, and uncertain rewards for vested individuals. Credit unions need to assess and build their own self-worth if they are to help members build their wellbeing.
Third, we need to think about the value of the charter. Losing one credit union a day is costing the industry critical points of presence in communities even when the result is a merger. Why not make it a policy to conserve and transfer charters to groups and volunteers who want to make a go of it, rather than the current practice of shutting down operations?
Fourth, with a widely diverse industry, regulatory policy needs to be segmented - just as credit unions segment markets. Smaller credit unions require different solutions, approaches and policy frameworks than larger ones do.
Finally, a restatement of mission would help to clarify the real advantages of cooperative charters. Currently, many credit unions assert that their advantages are member loyalty and trust, local presence, putting member needs first and the tax exemption. But are these real? How many firms with such traits have gone out of business, i.e., grocery stores, gas stations, service vendors, and other locally owned businesses? Credit unions need new words to describe their real advantages before consumers have to learn these things through experience.
A Full Agenda - What is the Real Issue?
Today NCUA has many activities on its plate. As with many credit unions, the Agency's tasks needing immediate attention keep pushing out the most important issue. But wouldn't it make a big difference in responding to the controversies surrounding conversions, modest means, small credit union initiatives, community service and so forth if there were a bold and clear statement of how a cooperative credit system can be developed for all Americans in this century?