It is not likely to show up on Oprah's favorite book list, but the 100-plus page United States Government Accountability Office's September 2004 report on corporate credit unions is still a must read for credit union officials.
Every credit union that invests in its corporate credit union has an obligation to read the GAO report as an exercise in routine due diligence. Despite its cautionary title, "Corporate Credit Unions: Competitive Environment May Stress Financial Condition, Posing Challenges for NCUA Oversight (GAO-04-977)," the report provides a largely realistic snapshot of the corporate credit union network.
Credit unions should make sure that their member-owned corporate gives the GAO report appropriate attention and acts to make certain that it remains a viable and effective business partner. With an ongoing emphasis on safety and liquidity, corporate credit unions are much too valuable to neglect and deserve constant fine-tuning to meet the evolving business challenges they face.
The GAO's 'Discoveries'
The GAO is the audit, evaluation and investigative arm of Congress. The GAO's Financial Markets and Community Investment staff spent nearly a year assessing corporate credit unions' business environment and the National Credit Union Administration's examination and regulation of corporates. Not surprisingly since they are essentially paid to worry on behalf of Congress, the GAO "discovered" potential issues that have been reported to interested members of Congress.
GAO staff auditors report that they have less faith than NCUA or the corporates do in the corporate credit union multi-tiered capital structure. In its own words, GAO says,..."corporates' limited ability to generate profits-as nonprofit institutions, owned and controlled by their primary customers-constrains their ability to build a financial cushion against adverse financial conditions or unexpected losses." GAO criticizes corporates for relying heavily on membership capital rather than primarily on reserves and retained earnings as a measure of capital. GAO even describes corporates' membership capital and paid-in capital as ..."relatively weaker forms of capital." What is a member of Congress going to think when he or she reads this and other safety and soundness issues raised by the GAO report?
The worst response that corporate credit union leaders can make is to fall victim to their own spin on this GAO report and underestimate the power of perception (rather than reality) in the halls of Congress. Making the plea that the GAO simply misunderstands corporate credit union capital will fall flat. One can certainly make the argument that when looked at as a whole industry, credit unions, corporate credit unions, and U.S. Central Credit Union are more than sufficiently capitalized to withstand the risks inherent in the current interest rate and general business environment.
On the other hand, one can also argue that the GAO's main point on corporate credit unions' capital-that not enough of it is reserves and undivided earnings-also rings true, especially with those who look at the credit union industry from the outside. Credit unions as a whole are well capitalized and strong. However, from time to time their various industry components may need a bit of shoring up to convince outsiders that all is well.
Although past reports from GAO that have had recommendations sit on the shelf and collecting dust, current circumstances suggest that this document's findings and recommendations should not be ignored by credit union supporters or by credit union detractors in Washington. Congressional financial institution oversight committee staff members will consider the GAO report to be required reading. It is also highly likely that bankers' lobbyists have already read the GAO report very carefully and are even now pondering how to use it to their advantage.
Even credit unions' biggest Congressional supporters are going to wonder about the GAO report's cautionary findings and conclusions. As a practical matter, much of Congress' support for credit unions is rooted in the belief that credit unions are consumer friendly, risk adverse, and unlikely to become a political liability. To receive their future support, these elected officials will want the continuing comfort that the credit union industry, including the corporate network, is "bullet-proof" and not at risk for a financial melt-down.
Despite the many Congressional supporters of CURIA, and the overabundance of "no taxation" pledges, elected officials are notorious fair weather friends and are sure to flee if storm clouds gather. Should any incident negatively rock the safety and soundness boat in the credit union industry, these politicians will become like rats departing a sinking ship.
The Credit Union Archilles' Heel
Corporate credit union leaders and their member credit unions' officials should also remember that the credit union industry's main strength- its cooperative, member-owned, multi-tiered structure-is also its Achilles' heel.
As was painfully learned in 1995 during the Capital Corporate FCU failure, any real or perceived problem at one component within the industry can lead to intense Congressional scrutiny and dramatic legislative and regulatory changes affecting all components. As always, the best defense is a good offense.
Regardless of the reason, corporate credit union leaders and lobbyists should take the GAO's criticisms seriously and fix the perception (or reality) now before any problems occur that could trigger unpleasant consequences.
A 30-year CU industry veteran, Marvin Umholtz is President & CEO of Umholtz Strategic Planning & Consulting Services. He can be reached at mumholtz@msn.com or 303-601-9065.
