Just like natural person credit unions, the corporate network had
its most successful year ever in 2001. At year-end total assets
hit $59.1 billion for the 34 corporates plus $32.2 billion for US
Central. So far in 2002, new records continue to be set as funds
pour in even though short-term rates are still at historical lows.
Earnings are good both in total dollars and as measured by ROA,
which was at 23 basis points in June 2002.
Yet just at this highpoint, there are forces pulling at the system.
Most corporates have national fields of memberships. In February,
at CUNA Governmental Affairs Conference in Washington DC, six of
the corporates had booths all looking to serve credit unions outside
of their historical markets. Mergers continue to slowly change the
concept of a "local" corporate in each state.
The corporate business model continues to evolve beyond investments
on the balance sheet. Competition now includes areas such as item
processing, electronic bill payment, securitization, broker-dealer
service and ALM advice. The result is that non-interest income from
these newer lines of business of $133.5 million almost equals the
total net income of $157.5 million in 2001.
How We Got There
Many credit unions would say that competition is good for them and
for the system. In fact many CEOs would question the need for the
US Central "third tier," which is still taking 17 basis
points out of the food chain. Why not let competition continue to
reshape the system until market forces have played themselves out
and those left standing become the new corporate network?
To understand why this outcome might not be optimal, one needs to
look at the evolution of the corporate network. This history might
be summarized in four eras.
- The first era is the "emergence" of the corporate
system from 1969, when WesCorp became the first federally chartered
corporate, to 1983. During this time rules were passed defining
a corporate, US Central was moved to Overland Park, investment
difficulties with GNMAs and Penn Square CDs were overcome and
a consolidated system was put into place.
- From 1984 to 1992, a highly integrated system grew from $8
billion in total assets to over $44 billion in 1992. There was
much attention to the network's "standards and guidelines,"
automated systems for settlement were installed, and most investments
were placed by corporates in US Central. The CLF made an agreement
with the corporate network to reach all credit unions.
- The next era, from 1993 to 1999, might be called "regulatory
purgatory." NCUA decided to go after interlocks and from
1995 through 1998 engaged in a series of rulemaking and examination
efforts to restrict the powers of the network. The Black Report
(1994) became an unofficial policy sanctioning more capital, national
fields of membership and elimination of the third tier. When Capital
Corporate FCU was forced into liquidation after being put into
conservatorship, the Black report's analysis took on added weight.
NCUA granted the first national field of membership to Mid Atlantic
FCU. Five mergers of smaller corporates began the inevitable move
to consolidation. Both earnings and asset growth were severely
restricted in these years.
- Today the system is going through a period of "entrepreneurship."
Business diversification continues, Internet communications easily
reach national fields of membership and larger mergers become
more feasible. With 15 corporates, not including US Central, over
$1 billion in total assets, the "system" begins to resemble
a series of feudal landlords occasionally paying homage to the
center, but not really feeling a need for a coordinating presence.
The Future Options
Corporates grew, much like natural person credit unions, because
US Central provided a "sponsor's role" for operational
and product development. The costs of 45 corporates developing their
own automated systems would have been prohibitive, not to mention
the lack of size and expertise to bring acceptable investment returns
to the corporate level. However, this "reseller" model
becomes much less viable once corporates accumulate the capital,
expertise and scale to manage their own core investment business.
The question is whether a need for a corporate "center"
still exists to coordinate or carry out functions that would be
difficult for 20-30 corporates to do individually. If so, do these
still require a credit union, or might they be accomplished by some
other organization such as a CUSO?
Before answering the operational options, I do believe there is
a political dimension. If the corporate network does not have a
center and migrates to a much looser social association, I believe
that the political center will be filled by NCUA. The CLF is the
means through which NCUA extends the lender of last resort authority
to credit unions. In its earliest versions at the Agency, the CLF
was to play the role of US Central. Because the interests of individual
corporates would be divergent and often competitive, there could
be no pushback on critical issues of regulatory policy. NCUA assumes
the coordinating function.
The Need for a Center
Certainly the investing role of US Central continues to decline.
Even as assets peak, the percentage of funds placed in US Central
continues to fall to 45%, the lowest since the system became integrated.
Some smaller corporates place over 90% of their investments with
US Central while some of the larger members fell to just 12% at
year-end. The role of US Central as an investment hub is dwindling.
In terms of borrowing authority, unlike the Federal Home Loan Bank
System, the commercial paper lines and term credits negotiated for
corporates have not been done on a collective basis. Each corporate
has negotiated independently or relied on US Central's external
The one area of consistent system use by all corporates appears
to be automated settlement. Credit unions settle thousands of transactions
daily via the corporate network. This highly automated system moves
billions of dollars to settle millions of member transactions without
In fact, as one looks at other national credit union systems emerging
for ATMs, shared branching or even indirect auto lending, a shared
operational network becomes a major factor for forming a national
system rather than a series of regional operations. National competitors
in each of these services force credit unions to also think on a
The Core Decision
These operational factors do not answer the question of whether
there should be six, ten or twenty regional corporates. But it does
suggest that there are some advantages in key areas for a national,
coordinated approach. For example, should credit unions build and
own their own national switch for ATMs? How should the emerging
issues of bill presentment be coordinated? How will ACH systems,
both governmental and private, be integrated into the network?
All of these issues suggest the opportunity for a networked approach.
For networks to succeed, a central point of coordination and operations
is needed. US Central may not be necessary for all of the investment
options offered to credit unions, but it could be crucial to a credit
union role in emerging systems of settlement. The challenge is to
find the best entry point and then create that credit union option
with the other corporates. The role of the "sponsor" is
changing, but the need for a "sponsor" would still appear