The recent announcement by two billion-dollar credit unions that they are pursuing conversion to a mutual savings bank charter (MSB) is indeed newsworthy.
The most oft-discussed aspect of this news is whether this is the beginning of an avalanche of CU conversions to MSB. Having been asked by Credit Union Journal to give our thoughts on that question, I would share the following.
It is my view from experience that unless the tax exemption is lost it is not likely that the recent conversion announcements-while indeed newsworthy-are the beginning of a major sustained trend that will signal the end of the credit union industry as we know it.
Over the past 15 years or so, there have been about 35 conversions out of about 10,000 CUs over those years. So, MSB conversions have averaged about two a year since 1995-hardly an avalanche. That average is right on the number of conversions currently underway.
In fact, since the conversion disclosure requirements were strengthened by NCUA in 2004, there have been nine conversions approved in the membership vote and another nine where the membership voted to disapprove or where the conversion was withdrawn because of sustained member opposition. So, it has become no slam dunk for credit unions seeking to convert that the membership vote will automatically go their way.
Insightful Analysis Needed
However, anytime there is increased MSB conversion activity, policymakers at NCUA and in Congress must conduct an insightful analysis to see just why the CU charter (with the tremendous advantage of the tax exemption) is being viewed by some as not as competitive with the MSB charter as it has been in the past.
While I am a true believer in the credit union charter and believe it to be the preferable financial institution charter today for those who believe in cooperative member ownership model and a non-stockholder-based corporate structure, I will be the first to admit that the charter does indeed need modernization. Some improvements will require congressional action (risk-based capital reform, secondary capital options, MBL cap increase, expanded FOMs), but much of the needed modernization does not require a vote of Congress and can take place squarely on the regulatory and supervisory front.
If NCUA and state regulators want to see credit unions remain credit unions, they must work wherever possible within the confines of safety and soundness to create a regulatory environment that allows CUs to succeed as credit unions.
Excessive regulation and a lack of flexible, balanced supervisory approach can kill the goose that has laid the golden egg for our industry (and for the federal and state regulators that oversee them).
My experience working with credit unions every day convinces me that almost all credit unions truly want to remain CUs. They believe in the mission and philosophy. The tax exemption is a major benefit not to be given up lightly.
The MSB charter is itself under attack and, frankly, has an uncertain future of its own. For example, the Office of Thrift Supervision that regulates MSBs has been consolidated into the OCC.
In fact, I am not convinced that-with meaningful capital reform that brought about a risk-based capital system with secondary capital options for credit unions - the conversion trend might not actually start to move slowly the other way, from MSB to credit unions. Charter evaluation eventually becomes a question of perceived charter viability to meet an institution's strategic goals.
My experience tells me that the preferred option for most CU leaders is for their institutions to grow and prosper as credit unions. They would just like to see unnecessary regulation be removed.
The Credit Union Horses
It is possible to be effectively regulated, without being excessively regulated. Without balanced regulation and charter modernization, these conversion efforts will make others at least evaluate the option. The best response of regulators and Congress would be to try to make the credit union horses stay on their more fertile pasture through balanced regulation and actions to modernize the charter through capital reform and FOM enhancements, rather than to try to put up higher and higher fences in hopes of keeping the horses corralled.
The best way to avoid any trend away from the credit union charter is to make it unnecessary through increased charter viability. In fact, with the right charter improvements at the statutory and regulatory levels, any trend that develops might start to flow the other way - from MSB to credit union.
Dennis Dollar is principal with Dollar Associates, Birmingham, Ala., and former chairman of the NCUA.
