WARRENVILLE, Ill. – Corporate credit unions are lobbying NCUA mightily for their future, with one plan emerging that would combine all 27 corporates into a single entity serving the whole country.
The new national corporate would consolidate the back-office functions of the existing corporates, provide geographically distributed sales and services, focus on payment, settlement and overnight services, and seek to reduce a balance-sheet presence as much as possible, according to Joseph Herbst, president of Members United Corporate FCU, which made the proposal in a comment letter to NCUA on its corporate reforms.
"This solution creates the most operationally efficient model, minimizes required capital, allows for retention of the best strategic assets in the current network and creates a new entity that credit unions will feel more comfortable capitalizing," said Herbst.
Herbst, whose $9 billion institution is among a handful of troubled large corporates, said NCUA-proposed amendments to its corporate rules will not be enough to recreate the corporate system and rebuild confidence among natural person credit unions.
The idea of combining all of the corporates has been floated for several months now but Members United is the first entity to put it to paper.
Herbst noted that Members United itself is the product of the combination of eight corporates and he told The Credit Union Journal he always has been a big believer in the need for corporates to provide scale and efficiency. But, he said in an e-mailed response to questions, that scale and efficiency needs to be contained within the credit union movement in order "to avoid relying on and enriching credit union competitors."
He also noted that Members United has endorsed corporate consolidation before, most recently in the March advanced notice of rulemaking on the corporate proposal, when it suggested consolidation to as few as four or six corporates may be optimum for the system.
"It is important to note that we are not recommending the elimination of the local presence but a consolidation of back office functions," he wrote in his e-mail. "Through the maintenance of a regional corporate presence, we believe that the one corporate model can strike a balance between the need for efficiency and the need of credit unions for the benefits of strong local relationships."
As the March 9 deadline for commenting on the NCUA proposal approaches, the corporates have ratcheted up their lobbying. Most corporates have provided model letters to their members to send to NCUA. NCUA acknowledged that more than a dozen letters appearing to be written by WesCorp FCU were identical. Southwest Corporate FCU recently created a link on its website to help members produce a comment letter. Numerous corporates are urging NCUA to ease off on some of the provisions that will make it harder to earn a decent spread they can pass on to their members.
Herbst asserts that the current corporate model, in which 27 entities compete with each other for diminishing returns, is broken beyond repair, especially considering the massive investment losses weighing down the system. "Clearly [corporates’] inability to truly be cooperative, in a cooperative industry, has hampered our ability to compete and, most importantly, to help [natural person credit unions] succeed," he wrote.
Large corporates provide the most resources in the way of services and products but are hurt the most by big losses. Small corporates, though less hurt by losses, do not have the resources to provide adequate services to natural person credit unions, according to Herbst.
Therefore a combination of all the corporates makes the most sense, he said. This would make the most of existing resources and minimize expenses.
The proposed new organization would focus on several core business lines, including payments, settlement, broker-dealer and other off-balance sheet activities. These all are services that natural person credit unions have told Members United they want from a corporate. In a scheme similar to the one proposed by CUNA’s Corporate Task Force last week, the national corporate would act as a type of pass-through for investment services, with most term investment products provided through the broker-dealer. An overnight mutual fund would be developed to minimize on-balance sheet assets, thus minimizing necessary capital contributions. The broker-dealer would continue to offer other value-added services such as balance sheet modeling and investment advisory that produce durable fee income.
Corporates merging into the national entity would do so voluntarily.
The objective would be to create one retail corporate with a central headquarters and operations, but with multiple streamlined branches that are geographically dispersed. The proposal said the principal advantages would be a significant increase in operating efficiency derived from eliminating redundant staff and operations, more efficient use of required capital, and the trust only found with a local presence.
The proposal, as with all of the others being contemplated by the corporates, rests on the future of the troubled assets – as much as $40 billion worth – held by Members United and the rest of the corporate system. Few, if any, credit unions will agree to recapitalize a corporate entity while the potential exposure of those assets remains. NCUA currently is developing a plan that would remove the so-called legacy assets from the corporate balance sheets and manage them en masse.
