A CEO's View On How Capital Ratio Rules Can Put A Lid On Growth
Something happened to our little central Indiana credit union. After decades of satisfying slumber and peaceful contentment serving a single sponsor, the Northpark Community Credit Union board hired new management, and gave us the task of growing the membership.
We made a plan. We opened a full-service branch and an in-store branch in locations that were desperate for credit union services. We implemented our business development and marketing strategies. We nearly doubled the numbers of members, assets and employees over 18 months. Our amazing two-year run of good fortune was born of hard work by a dedicated staff. We had fun. Then "it" happened. The party was over.
We ran up against our capital ratio limitations. Our capital dropped from over 15% to just under 10%. Auditors and examiners told us under-10% capital levels were hazardous to our health. We had great audits and exams, showing vastly improved key performance ratios. Membership growth rates exceeded 44% (down now to only 20%). During the exit review an examiner told our board that we needed to take a two-year "time out" before growing anymore. Capital needed to be rebuilt. He lectured us to be more patient. We were frustrated. We believed more people and businesses could benefit from the credit union experience, but that wasn't going to happen now.
Even Google Had No Answer
Before pulling the trigger on our healthy business development and marketing "thoroughbreds," we talked to everyone: other CEOs, consultants from the league, and officials from our corporate CU. I even turned to Google. We knew there had to be a solution. However, there is no alternative to growing capital except retained earnings. But everyone reading this article knows that, already, don't you?
So we laid-off two perfectly fine business development reps and slashed our marketing budget by more than 50%. We told 75% of our automobile business partners we were not interested in buying auto loans. Realtors and business owners were told we may talk about doing business with them in "a couple of years." I had to explain to the board we had to go back to sleep for a while. We had to "cool it."
GAO Offers Some Answers
A U.S. Government Accountability Office (GAO) Report dated August 2004 titled "Available Information Indicates No Compelling Need for Secondary Capital" provided the answers we searched for. It stated that credit unions were already heavily capitalized due to their conservative business nature. The report said that the leadership of the movement could not agree on acceptable sources for alternative capital. Therefore no plan for alternative capital was provided to the GAO for consideration. Sources of capital from outside the movement would threaten our tax exempt status. There were references to PCA "traps" and warnings of the unhealthy, excessive growth of banks and savings and loans back in the 1980s and 1990s.
But of all that, however, here is what forced me to take a calming midday drive in my Ford F150. The GAO report clearly stated that federal regulations existed in their current form to keep credit unions "under control," from growing excessively. The report stated that credit unions should be satisfied to be growing at a rate faster than banks and savings and loans. The GAO report referred to credit union managers and boards as inexperienced at managing alternative sources of capital.
So what is the solution for credit unions that are experiencing above-average success, have communities grateful to have a credit union they can trust, that are rapidly growing their assets and membership? We want to stay a credit union and retain our federal deposit insurance.
One solution would be to go to sleep. But what will the world look like in two years when we wake up? I could learn to play golf or buy a bass boat. Opportunities are already passing us by, and we hate it.
A National Association of State Credit Union Supervisors (NASCUS) white paper written in 2005 responded to the federal government 2004 GAO report. It outlined three possible solutions to alternative capital. By the way, the association consists of regulator-supervisors who strongly support the need for a solution to alternative capital for credit unions. NASCUS acknowledged the GAO's three central concerns:
* Outside investors could threaten the member-owned, cooperative structure of CUs.
* Inside investors raise concerns that systemic risks may occur when failing credit unions could bring down stronger credit unions.
* There were no models provided by the movement for study by the GAO.
I am against investors outside the movement meddling with credit union principles. Insiders respect what motivates us.
The "inside investors" argument that failures by some credit unions will bring down the entire movement is grossly exaggerated. The credit union movement's systemic risks are different than systemic risks we see in banking today. The credit union movement has a history of discipline, free of the greed witnessed in investment and commercial banking these days. By saying the movement should not permit systemic risk by not permitting conservative management of these risks says credit union executives are poor risk managers. Historically compared to bankers, credit union executives have shown we can be trusted with managing risks, as measured by federal bailouts. Here is a point for consideration.
The Role of the Corporates
Corporate credit unions have money to invest. Though other natural-person credit unions would also be eligible, corporate credit unions are the preferred "inside investors" that should be explored. They have investment experts who understand risk assessment. Instead of investing in instruments purchased from Lehman Brothers which they know less about, why not empower corporate credit unions to invest in natural-person credit unions? They are in the business of knowing more about credit unions.
Additionally, there is less risk when investments are spread over many instruments (credit unions), rather than having billions invested in a few hard-to-understand investments. Corporate credit unions can serve credit unions and position us to serve more members. By investing in credit unions with sound performance and business plans we solve many issues. We are encouraged to grow, not fall asleep. I perceive my credit union and our members to be easier understood investments versus whatever was offered corporate credit unions by Lehman Brothers. Of course, access to alternative capital would take an act of Congress and state legislatures. Then why not ask them? This is a time for collaborative action.
A Mess of Spaghetti
Congress is throwing trillions of dollars of spaghetti on the wall hoping something will stick that will help the economy recover. Meanwhile, Congress' equity investments in big banks have yet to help thaw frozen financial markets. Instead, some banks are using billions of taxpayer dollars to buy their weaker competition. Of course, this state-sanctioned bank consolidation and government-backed grab for market-share is fine with the Treasury Department. Sooner or later, the Treasury hopes, big banks will get around to helping customers and businesses. Taxpayers, mortgage lenders and the Big-3 automakers are still holding their collective breath waiting for banks to start the flow of money.
In 1934, President Roosevelt turned to a fledgling credit union movement as part of the answer to help Main Streets and just-plain-folks all over America get back on their feet. Banks supported it then. They believed then individual consumers were too high a risk for an industry totally focused on business lending. We have a feeling that may not be the case this time. However, banks may just be distracted enough by their own problems and greed to notice our efforts or have the political capital to fight us.
It is time to stand up and fight again for what the credit union movement believes is right, for what credit unions can do to help this economy recover.
Dan Robbins is president/CEO of NorthPark Community Credit Union, Indianapolis. He can be reached at email@example.com.