The Corporate Rule and the System’s Future

NCUA should think less about “being in control” and more about working cooperatively to shape a system for the future.


The corporate rule-making process is not about the future of corporate credit unions. Rather it is about the future of the cooperative financial system in America. One critical axiom must be remembered when addressing any credit union issue, but especially this one: the fate of the parts and the whole system are inseparable.

When this is forgotten the fundamental difference between cooperatives and for-profit firms is lost.

For the 75 years since Estes Park individual credit unions have joined together to build multiple levels of interdependent support. Based on cooperative principles, these social, political, and economic organizations – from leagues and CUSOs to the CLF and NCUA -- have evolved into a system in which all credit unions are able to provide member value far beyond the resources of their individual organizations.

The Critical Issue

Credit unions lobbied Congress to pass the Federal Credit Union Act in 1934, but NCUA has been in existence only since 1977. Credit unions, through legislation, created the agency with its three-person board, the CLF, and their own insurance fund(s). In short, NCUA needs credit unions; credit unions do not need NCUA to succeed.

The critical issue then is whether the current components of the system can work together in a collaborative "partnership" model, or will credit unions have to find and create other structures to assure their unique role as member-focused financial providers.

Consider the savings and loan industry, founded to meet America’s need for housing finance: After the S&L crisis of the 1980s, the insurance function (FSLIC) was absorbed by the FDIC; the regulator was recast as a bureau in Treasury, and the liquidity function (the FHLB system) became open to all firms serving the mortgage market. Could such an outcome be a future for credit unions?

Cooperative Regulation is Different

The cooperative financial regulatory system is organized under an entirely different set of structures and principles than is the for-profit regulatory structure of banks and thrifts. In the market-based system, the regulator protects the public interest from the excesses of private ownership. Banks and thrifts receive public licenses (charters) to do business and benefit from government insurance of deposits so that individuals and shareholders can make money. The insurance, liquidity, and regulatory system are to protect the public interest from any private firms’ failures to maintain a financially stable system.
But the cooperative system is built on common wealth. Public purpose and cooperative structure have a single goal: to serve members in critical times and in ways the private firms cannot. This public policy covenant is why credit unions are exempt from taxation.

To carry out this function, credit unions created their own liquidity system in which the corporates and the CLF were integrally entwined. Each depended on the other, and their common goal was to assure liquidity in all times and circumstances. The CLF was given special access to borrow from the U.S. Treasury (subject to Congressional authorization), not the private marketplace, to meet this purpose.

Credit unions established their own unique insurance model in 1984. In the midst of the early ‘80s recession, it became clear that premium-based, actuarial financing concepts were inadequate for a severe economic or financial crisis -- capital was needed. The NCUSIF was restructured, using cooperative experience, to ensure there would always be a collective capital source when market forces overwhelmed individual institutions.

But these cooperative regulatory functions differ from banking solutions on more than structural criteria. A different set of principles, or values, formed these credit union components. Cooperatives hold assets in common. Trust, transparency, and collaboration are critical factors when organizations, even with different roles, work within a common system.

Corporates: Did NCUA Have Credit Unions’ Back?

As the corporate system evolved in the first decade of the 21st century, some participants forgot their obligations to the common system. Their ambition was to dominate, take over, and create an oligopolistic network rather than foster a common system of both large and small institutions. Governance was compromised, and checks and balances were forgotten as all corporates enjoyed a relatively successful 25-year run interrupted by only the CapCorp failure in 1994.

An important part of corporates’ overall success was the belief by credit unions that NCUA and the Office of Corporate Credit Unions -- in military parlance -- “had their back.” Credit unions assumed that in-depth exams and on-site regulatory presence were effectively overseeing corporates.
NCUA repeatedly assured that this was the case, as noted by two examples in the box at DIRECTION TO BE PLACE BY DESIGNER – Michelle, best not to place the box at end but somewhere someone reading the middle of the article can switch her/his eyes to --bcs.

The purpose of the NCUA reassurances in the box as well as many others is not to pass judgment. All analysis is subject to error, especially when it comes to unprecedented circumstances.

But when errors occur, cooperatives react to problems differently from profit-making firms. For-profits generally want to take their losses and move on as quickly as possible to the next promising opportunity. Their shareholders and regulators want to see profits (capital) grow quickly, not endure protracted workouts.

But cooperatives can take the long view, rely on collective resources, and anticipate recurring cycles of value. Credit unions do not jump to new markets or business.

The Proposed Rule Is Unworkable

The corporate rule in its current form is unworkable. No one with experience has questioned this. WesCorp’s expert analysis – which NCUA told [?] WesCorp to remove from Wescorp’s website -- is just one example.

So what’s next? Does NCUA try to fine-tune the rule, or is a more comprehensive response needed?

There will be an overriding inclination for NCUA to hang tough, stick to its rhetoric, and try to assert control by taking over the toxic assets. If that happens, many credit unions will just walk away and set up other solutions. Many corporates and natural person credit unions will just “wire around” the rule. Credit unions and most corporates will continue, but the result will be a less integrated, and probably less sound, system.

The system will be weaker not because of the inadequate rule. Rather it will be weaker because the agency is incapable of evolving its own response. The crisis is over, and markets have returned to normal functioning. Nevertheless NCUA still wants to be “in control.” But it wasn’t in control in this way in prior years, nor can it “control” outcomes any more precisely going forward.

Rather, the Board should fulfill NCUA’s regulatory responsibility -- which is different from being in control -- by working collaboratively to create solutions that meet the needs of all parts of the system.

The Tipping Point

Credit unions are at a tipping point in public awareness. Market and member needs – and a larger role for credit unions in America’s recovery -- are here. In addressing the corporates, some activities need to be ended. But more importantly there is an opportunity to formulate a multi-generational outcome for the credit union system in a reconfigured corporate network.

NCUA can participate in defining how that opportunity is to be realized or it can stay on the sidelines. Staying on the sidelines is not in anyone’s interest nor will it advance cooperatives’ public purpose. The corporate rule-making process could provide a critical component for the next decade of cooperative success -- or create the need for another set of institutions to fulfill cooperatives unmet promises for America.