The Credit Union Way
New regulatory legislation will not only be part of any bailout. It will also be a top priority for the new administration. Why? Because we know now who the new GSEs-- that is stockholder-owned companies that are too big to fail--will be. They are Citigroup, Bank of America and JP Morgan Chase. A couple more may be added to this list before the markets are settled.
So no one will want to repeat the Fannie-Freddie mistake of letting shareholders benefit but government taking the losses. These trillion dollar financial conglomerates will face a new regulatory attitude and structure.
Regulatory "Reform" Already Underway
Already some are predicting the end of the OTS and the thrift charter. OFEO now regulates the FHLB system, not the old five-person board.
It will be critical in this environment that credit unions have their legislative priorities clearly defined, if they are to stay clear of the new regulatory vortex that will be created in 2009. What should these priorities be?
Credit Union Regulatory Reform
Every initiative should focus on strengthening the credit union system’s ability to serve members in a cooperative structure. The changes that would make this more effective could include:
Membership capital accounts. Similar to USAA’s insurance model or Vanguard’s mutual funds which own their advisor, membership capital ties participation and ownership together in the member’s relationship.
Clarified Role of CLF. Make explicit, if necessary, the role of the CLF in providing liquidity to the system by promoting access to secondary markets with CLF involvement.
Enhanced transparency for members and a clearer process for capital accountability in the event of conversion.
Easier rules for banks and thrifts to convert to a credit union charter. Given the probable changes in bank regulation, the cooperative charter may become much more attractive.
Clearer standards to encourage the chartering of new credit unions as an Agency responsibility and priority.
Each of these key areas would significantly enhance the role of cooperatives as providers of economic resources to their members.
The core focus, however, should be to keep the cooperative model intact and separate from the market-driven model of banking. Additional ideas such as increasing CUSO investment limits or incentives for member savings could be included as long as they enhance the cooperative structure.
Why Cooperatives Matter
Cooperatives are especially important in times of market crisis. As hard as regulators and legislators will try to prevent future problems, these are an inevitable part of the market’s creative dynamic. A clear statement of this reality is an excerpt from Rudyard Kipling in 1919:
Then the Gods of the Market tumbled, and their smooth-tongued wizards withdrew
And the hearts of the meanest were humbled and began to believe it was true
That All is not Gold that Glitters, and Two and Two make Four
And the Gods of the Copybook Headings limped up to explain it once more.
Cooperatives manage their copybooks for members, not for the Gods of the Market.
Part I of this article is available here. Part II is available here.