Successful Credit Unions Have Outgrown Their Regulatory System

There are some serious disconnects going on, ones that imperil the safety and soundness of credit unions. One is the disconnect between credit union members and their credit unions. The other is between credit unions and their regulators.


There are some serious disconnects going on, ones that imperil the safety and soundness of credit unions. One is the disconnect between credit union members and their credit unions. The other is between credit unions and their regulators. Think of members -- or the financial service clientele at large -- as being on one railroad track. It is engaged in a curve that has been and is becoming increasingly sharp. It is pursuing the goal of greater convenience, faster transactions, better technology, lower borrowing costs, and higher returns, most notably long-term returns for college and retirement, even at the risk of no federal insurance.

Credit unions are trying to stay on a parallel track in order to keep up with the members, but the credit union curve has very often been less sharp. It is in danger of allowing more and more distance to intervene between its track and the members' track. It tries to offer the technology the members -- or potential members -- want, tries to offer the convenience, rates, products and services they are demanding, but finds the attempt to do so very much a struggle.

Regulators are yet on a third track. This one has the shallowest curve of all. Increasing distance is building up between it and the credit union track. The reason for the divergent paths or tracks is not too hard to fathom. Organizations such as credit unions are market-driven. Regulatory systems are bureaucratic and not market-driven. The bureaucratic system can change, can follow a curve, but very often it is not going to be on a curve parallel to the market-driven one.

This is what is happening now. Credit unions are on the middle track. Members tug it from one side; regulatory bodies from the other. Members are not going to pay much attention to regulatory bodies; they are going to go where the good products and services are. Credit unions will try to keep up at the pace regulators allow. If the regulators don't provide the flexibility and responsiveness needed, the credit unions won't be able to keep up and the not-for-profit cooperative alternative to for-profit banking in this country will cease to exist.

A Bit of History
Early in this century the American people needed an alternative to banks. Common people pooled their resources and made credit unions, which became charted in two dozen states. Credit unions were created to serve people, and they did so. In fact, they were doing such a good job, they petitioned Congress to allow for a federal charter and credit unions across the country. Congress obliged.

Thus we don't have to concern ourselves when people ask, "But what did Congress intend us to be?" Our movement does not exist because it was created from the top down; rather it was created from the bottom up. We told Congress what we intended to be: cooperatives that would try to serve the needs of its members whatever those needs might be.

Back to the railroad track analogy. At the time of the organization of credit unions early in this century, credit unions were on a track exactly paralleling that of the members. The members, after all, created the credit unions in order to exactly keep pace with their needs. When the government helped set up a regulatory system in the 1930s, its track was in pretty close parallel with that of the credit unions, too. Otherwise, as everyone knew, the credit unions would not be able to keep pace with member needs, members would drift away and credit unions would fail.

You might say that the best "safety and soundness" in those days was really keeping the credit unions up to speed with the demands of the members -- and potential members.

It is worth noting that we did not tell Congress we wanted to be "safe and sound" institutions. We always knew that if we were lending to our members, there was risk involved. Serving came first; safety and soundness was a means to the end of serving.

Getting Back in Synch
Now we are faced with three tracks but on curves that are somewhat out of parallel. Members are on the steepest curve -- they are changing the fastest. Credit unions are on somewhat of a less steep curve; they are changing, but not as fast. Well, to be more precise, some credit unions are changing as fast as the members and are being successful while other are changing less fast and becoming increasingly distant from the members and potential members. The point is that as a whole, credit unions are finding it difficult to keep up. The regulators are changing too, but not so fast as the other two. They are not so cognizant of just how rapid the changes in the real world are. They, in part, focused on a bookkeeper's definition of safety and soundness.
When really, the ultimate safety and soundness is not the level of capital but how well the institution is attuned to the market. If it is not tuned well, it is going to fail no matter its present level of capital. If it is tuned well, it will retain and attract members and it will be healthy.

Our task now is neither to jump the track we are on to new forms of charters nor to allow the three tracks to drift further apart. Our task is to bring the credit union track and the regulator track into a parallel relationship with the member track.




Jan. 3, 2000



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