An independent researcher has found there is little or no benefit for the vast majority of members of a credit union that converts to a bank charter, and is suggesting a demutualization method that would provide for a "more fair" distribution of capital and eliminate the "perverted incentive" to convert.
At the Filene Research Center's behest, Dr. James A. Wilcox conducted a study of credit union-to-bank conversions to determine who and how such conversions benefit.
"We wanted to know what are the incentives, what are the facts about these conversions," said Filene Director of Research George Hofheimer. "There are a lot of emotions surrounding this topic, and we wanted to get beyond emotion to facts."
Thse "facts" as reported in the study, entitled "Credit Union Conversions to Banks: Facts, Incentives, Issues and Reforms," released by Filene, include:
* Of 17 credit union conversions between 1995 to 2002, 14 have issued some type of stock or merged with stock-issuing institutions and two additional former CUs have converted to mutual holding companies that may issue stock without an additional vote by members.
* Members are unlikely to benefit from conversion if their CU provides moderately better loan and savings rates than stock competitors or the CU is no overcapitalized. Overcapitalization can be resolved by distributing excess capital to members, as credit unions are designed to do.
* Of converted credit unions that have converted and issued stock, the median "pop" of that stock in the initial public offering was 19%.
This last point, Hofheimer noted, "really speaks to the perverted incentives that exist for converting."
And while conversion proponents point out that all members can share in the wealth to be made by converting, that hasn't been how it's worked out for most members, historically.
"When the converted credit union moves to issue stock, members receive a prospectus in the mail, and it's really thick and really complex, and most members simply don't understand the opportunity that is being offered," Hofheimer explained. "Only about 10% of members take advantage of it, meaning the vast majority of members see no benefit. Directors and managers benefit greately, but members generally don't."
Indeed, in the case of former IGA FCU, only 5% of members bought stock when the institution conducted its subscription offering.
The report also proposes a demutualization alternative that the NCUA could implement without requiring legislation, by permitting credit unions to convert directly into stock commercial banks, "eliminating the perverted incentive to convert in the first place," Hofheimer related. "So if, and that's a big if, if a credit union really believes it is hamstrung by the credit union charter and it would be in the best interest of members to convert, then here's a fair, equitable way to distribute that capital pro rata to members."
Why the big "if?" Because Wilcox's research shows that none of the credit unions that converted between 1995 and 2002 "had their backs up against the wall," Hofheimer said, adding "They were not hamstrung by the credit union charter."
Hofheimer said Wilcox is in a unique position to not only research this topic but also to propose a public policy remedy. In addition to his position at Haas School of Business, University of California at Berkeley, Wilcox has a financial regulatory background, having served as the chief economist at the Office of the Comptroller of Currency, as well as serving as an economist at the Federal Reserve Board of Governors. Moreover, Wilcox is on the board of directors at a credit union.
