Taking the King's Schilling: Part III

It will be critical in this environment that credit unions have their legislative priorities if they are to stay clear of the new regulatory vortex that will be created in 2009. What should these priorities be?


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:

  1. 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.
  2. 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.
  3. Enhanced transparency for members and a clearer process for capital accountability in the event of conversion.
  4. 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.
  5. 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.




Sept. 29, 2008


  • cwf
  • There is no financial incentive to open a credit union and until there is one our industry will continue to consolidate at its current rapid pace. Why would the owner of a bank convert and give his capital to member/owners? Ridiculous idea!
  • I have talked to a couple of community bank CEO's recently that want to convert to a credit unin charter. The issue?, their boards are resistent due the prohibition on paying cu board members; still such conversions are plausible.
    Ray Dowling
  • Marv, Never gave up on you; always knew your heart was right; welcome back!
    Jim Blaine
  • Alternative capital should be an option and not mandatory, but it could assist credit unions to match their competitors in deploying infrastructure, inject a bit more market discipline into a credit union’s operation, and give credit union members (and non-members) a chance to tangibly invest in the institution. Credit unions of all sizes could exercise the capital option in contrast to obtaining increased powers that only larger credit unions can afford to implement. Rather than invest “political capital” chasing illusive powers and reduced capital requirements, the credit union industry would be better served seeking the legislative and regulatory changes needed to increase capital through alternative sources. Whether one calls it alternative capital, secondary capital, supplemental capital, tier 2 capital, or paid in capital, such alternatives will need to act like equity capital and be perceived by the marketplace as a desirable investment.
    Marvin Umholtz
  • Anyone that thinks a commercial bank is likely to convert to a credit union charter is way off base. Not going to happen! 1. No way to raise additional capital. 2. No stock options for management or directors. 3. Severe business lending limitations.