The Case for Change

Recent, well-publicized internal NCUA problems are symptoms of a much larger issue. Credit unions are fighting for their survival, their relevance during a time of extraordinary change and opportunity. In a networked era during which cooperative, Internet-based solutions could be changing the options for consumers, credit unions are at a regulatory disadvantage. NCUA has not grasped this challenge.

 
 

Recent, well-publicized internal NCUA problems are symptoms of a much larger issue. Credit unions are fighting for their survival, their relevance during a time of extraordinary change and opportunity. In a networked era during which cooperative, Internet-based solutions could be changing the options for consumers, credit unions are at a regulatory disadvantage. NCUA has not grasped this challenge.

Two examples point out NCUA's failure to understand the change in credit unions' market situation. The first is the flight from the federal charter. Conversions to state charters are now being talked about by most credit unions. Although many have decided not to change, the topic has been brought to a federal credit union's board table more frequently.

The second example is even more telling, however. The current NCUA policies have allegedly been directed at helping small credit unions survive. But the data shows that the reverse is true.

71% of Credit Unions are Going Out of Business
Over 71% of credit unions have fewer than $20 million in total assets. Looking at these credit unions' recent performance shows that members are slowly liquidating their involvement. The majority of these credit unions have negative share growth. Membership growth is less than half the national average. These credit unions must spend from 25% to 70% more on operating expenses than they can pay in dividends. They must charge more on loans than larger credit unions to sustain their margin to pay the higher expenses. Few can offer share drafts or credit cards and their average share and loan balances are only 15% to 30% of that of larger credit unions.

These 71% of credit unions are going out of business. They are not producing value for their members. With rare exceptions, such as significant sponsor support or unusual sacrifices by a management and board team, the credit unions cannot keep up.

Not Just the Small
But they are not alone. The rest of the credit union system is suffering from the same market-driven changes as are the small ones. Larger credit unions may have more options to stave off short-term assaults, but not the inevitable outcome. Today, consumers are looking for ways to manage their funds and financial relationships very differently from the ways of the 1960's and 70's credit union model. Credit unions need a much more open and responsive regulatory system to meet members' changing expectations.

A Different Kind of Failure
Because there have not been the insurance losses that characterized prior periods of change in financial services, many people today assume that the system is sound and that the future is, even if uncertain, at least assured. Nothing could be further from the truth. Failure today is caused by a loss of relevance. The problem shows itself most clearly in the smaller credit unions, but the challenge is one every credit union faces. NCUA has not responded to, let alone recognized, this sea change facing the credit union system.

What's Needed with New Leadership?
Two qualities will be necessary in the new leadership at NCUA if the regulatory climate is to help credit unions reverse the trends outlined above.
The first is an administration more open to the demands and requirements of the marketplace. Members are not tied into their credit unions by some special charter or regulatory fiat. Members have choices and will go where they can be best served.

The second is a more open and conscientious administration of NCUA assets and personnel. Spending more is not the key to effectiveness; nor is a larger workforce. Focusing on unleashing the power of credit unions to cooperate may entail fewer agency resources in some areas.

The case for change is not a Republican or Democrat issue, or a liberal versus conservative view of government's role. Rather it is recognition that credit unions, despite widespread participation, often have very shallow member relationship roots. Finding ways to enhance the way credit unions serve will be an enormous challenge. Likewise, new leadership at NCUA needs to redefine how the agency plays its role in the credit union system.

 

 

 

Jan. 22, 2001


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