ALEXANDRIA, Va. – As a growing number of executives and volunteers call for the consolidation of the corporate credit union system the big question being raised is: which corporates should survive and which ones should not?
That’s because, in contrast to the evolution of the natural person credit unions, it is the smallest corporates that are in the healthiest condition and the biggest, most diversified ones that are critical. In fact, eight of the 11 biggest corporates had negative equity at Jan. 31, a critical factor in determining solvency. Those eight large corporates account for more than 95% of the more than $20 billion of unrealized losses the corporate network holds on its books.
As a result, several small corporates are calling on NCUA to move slowly on any plans to consolidate the system as they may be targeted for elimination.
"Overall, Midwest Corporate believes that there is no evidence that the artificial consolidating of corporate credit unions, or elimination of the two tier corporate credit union system, will lead to more efficiencies," wrote Douglas Wolf, president of the $240 million North Dakota corporate, in a comment letter on NCUA’s proposed corporate reforms.
Wolf, whose corporate continues to report positive equity at Jan. 31, suggested that the consolidation of the system over the past few years has failed to improve the workings of the corporate network. "In fact," he wrote, "if corporate credit union mergers in recent years are any indication, the consolidation into ever larger retail corporate credit unions leads to less efficiency and more risk for the system."
Referring to the elimination of more than a third of corporates since the 1995 failure of Capital Corporate FCU, David Savoie, president of $150 million Louisiana Corporate CU, wrote "there remains no persuasive empirical evidence that economies of scale benefitting credit unions were achieved through consolidation."
"Certainly," wrote Savoie, "the losses now being reported outweigh any economy of scale benefits that are purported to have been realized."
"Bringing about structural consolidation of the corporate system by eliminating healthy corporates with proven ability to serve their members and operate soundly would not add a penny to the network’s total equity," said Savoie, whose corporate continued to report positive equity at the end of January.
Stephen Roy, president of TriCorp FCU, the $740 million Maine corporate, also with positive equity, urged NCUA to retain the current two-tier corporate system, saying the elimination of U.S. Central FCU would disperse greater risk among the other corporates. "It has been proven by the many corporates primarily invested in U.S. Central that have no or minimal unrealized losses on their balance sheets that the current tiered network works if we aggregate investment risk," wrote Roy.
In contrast, Members United Corporate FCU, the $8.6 billion Illinois corporate which reported negative equity of $1.7 billion and more than $2.1 billion of unrealized losses at Jan. 31, is conceding the likelihood of a consolidation of the corporate network.
"Under the current models the fewer the corporates, the more efficient the network would become," wrote Joe Herbst, president of the Illinois corporate, in his letter to NCUA. "These inefficiencies may be tempered somewhat if the level of competition was dramatically reduced and cooperation was dramatically increased."
Herbst told NCUA there is a consensus among his more than 1,000 credit union members that the network should be consolidated into four to six corporates. "One national corporate represents too much concentration risk while the current system has too many corporates," Herbst wrote.
