When the House Financial Services Committee hears testimony this week on easing the process for chartering new financial institutions, credit unions will have plenty of numbers on their side – but the numbers may not answer the bigger question: do we need more new credit unions?
According to the National Credit Union Administration, just 28 new natural-person credit unions have been chartered since Jan. 1, 2008, eight of which were later closed due to mergers, liquidations or canceled charters. In that same time period, the regulator shuttered more than 140 natural-person CUs – and that’s on top of the larger contraction within the industry as healthy CUs band together or smaller, poorly performing credit unions are gobbled up by larger ones. By NCUA’s own account, there were 7,292 federally insured CUs at the end of Q1 2011, compared to 5,785 at the end of 2016, though NCUA representatives were quick to note that the majority of closed credit unions are absorbed into larger institutions without loss of service to members.
While the congressional hearing pertains to all financial institutions, some in the industry have previously said that
'Healthy debate'
NCUA declined to comment on this story, and not surprisingly, most industry sources weren’t willing to go on record as saying the current level of credit unions is enough. Many, however, noted that there are a variety of external factors at play beyond just the difficulty in obtaining a new charter.
“If a group of people don’t feel they’re being served by another credit union, then they should absolutely be able to form a new financial institution if it is economically feasible and there is a need,” said Carrie Hunt, EVP of government affairs and general counsel at the National Association of Federally-Insured Credit Unions. “While it’s true that there are many options out there for consumers to join a credit union, it’s certainly not absolute. We look at maps of the country and look to see where there are credit union branches, and there certainly could be additions and improvements.”
John McKechnie, a former NCUA and CUNA staffer and now a credit union consultant, noted that while Washington can enact reforms to move things in a particular direction, the vitality of a particular institution is ultimately up to consumers in the marketplace.
“There’s a healthy debate within the industry right now about whether [consolidation] is because consumers don’t want those institutions or because the burdens of the regulatory world are too difficult,” he said, adding “What’s making it difficult for small credit unions to survive and thrive has nothing to do with consumers…and more to do with the overall regulatory climate and the marketplace.”
Dennis Dollar, a former NCUA chairman who now runs an Alabama-based credit union consultancy, told CU Journal that the challenges of de novo charters – including finding FOMs broad enough to sustain long-term growth, as well as the demands for capital sufficiency and required limitations on services until the institution reaches financial maturity – often lead many would-be charter applicants to elect to become a SEG or associate with an existing institution rather than starting their own.
“With all of the very understandable requirements that NCUA must put on new credit unions to avoid their failure early in their infancy, I don't know much that can be done legislatively or in regulation that will dramatically change – other than perhaps around the margins – the simple market-based reality of FOM challenges, building capital sufficiency and restrictions on initial services offered,” he observed.
Isn’t it supposed to be hard?
In spite of the decreasing number of credit unions, membership growth has been on the rise for the last several years, with more than 106 million American consumers now credit union members. While it can still occasionally be difficult for some consumers to join credit unions, by and large membership has become increasingly easy to come by over the last two decades. The ranks of community charters have grown significantly, and even
Geoff Bacino, a former NCUA board member, is of the mind that it should be hard to charter a new credit union.
“There are a lot of people – the traditionalists who have been around forever – who talk about the good old days where four of us got together and kicked in $5 and you’d be the president and I’d be the vice president and you could start a credit union,” he observed. “To be honest, in today’s complex financial world, that’s just not practical…So yeah, it should be hard. And I don’t know if we’re ever going to be able to make it easier, or if we should.”
After all, observed NAFCU’s Hunt, the marketplace is vastly different today than it was in even the late 1990s, let alone decades before that.
“I think that there needs to be an understanding of the economics of what starting a new financial institution means,” she said. “The expectations of what consumers need and want from their financial instructions are different today than what they were 20 years ago, especially in terms of either mobile banking or other types of products and services, so there is a lot of pressure on new, fledgling institutions to try to provide the services that their new members want and need.”
She added that NCUA carefully considers whether or not a new institution will be economically feasible before granting a charter, but “there is a distinction with having stringent requirements in place versus whether or not there’s some regulatory red tape or a process that’s particularly hard that could be made easier.”
And it’s not as if credit unions are the only financial institutions dealing with consolidation: banks – community banks in particular – have also struggled with many of the same challenges as CUs, including the costs associated with a combination of increased compliance and consumers’ demand for new technologies, conflicts with examiners and competition from mega-banks.
“If you look at the number of banks and the number of credit unions over the last 20 years, it’s going down – it’s not a trend, it’s the way things are going,” said Bacino. “I don’t think we’ll ever reach a place where we’re going to start chartering a lot more. It’s a romantic idea and I can appreciate it…but it’s probably not a fiscally practical thing to do.”
After the hearing
So what then of Tuesday’s hearing?
“It’s titled that it’s about chartering new financial institutions, but what it really is about is the regulatory burden,” observed McKechnie. “I think the Republican Congress in general is interested in hearing about how regulatory burdens present such an obstacle to financial institutions – especially smaller ones and ones starting out – that it’s part of their overall case for regulatory relief.”
NAFCU’s Hunt said this hearing is the first time in recent memory that the House Financial Services Committee has examined the issues surrounding the difficulty of chartering a new FI, but she wasn’t optimistic that concrete action might occur as a result.
“If there is some sort of unnecessary regulatory issue that can be addressed, we would be supportive of that,” she said.
Bacino offered a more blunt assessment.
“Most of the hearings on the Hill nowadays tend to be shows,” he said. “You really can rarely expect to get a lot out of it. In reality I think what you’re going to find is that people make their statements and everyone will make a case for why they should have more credit unions chartered, but in the end it’s hard to reach any type of consensus as to how we’re going to do that.”
