Now that NCUA has said it has no objections to some corporates moving forward with plans to raise new capital, it is also is a good time to look back at how and why corporates came to be, as much of their good work is simply taken for granted.
Corporate credit unions were (and are) so successful for nearly 40 years that most CU board members never needed to know much about them. Instead, corporates performed in the background-handling funds transfers, payments and settlement; providing liquidity, and serving as a vehicle for earning on overnight and other investable funds. The business of the CU board was to discuss growth strategies, member service and how to make more loans; certainly, there was no reason to confer on corporates at credit union board meetings, any more than one would talk about flicking on the lights.
By the time CUNA and the leagues developed corporates in the early 1970s, all-or nearly all-CUs had bank accounts and were given free checking services. "Free," that is, if the credit union kept considerable liquidity with the bank in a non-earning account. Banks earned far more income from CU balances than what it cost them to provide the free checking. After CUs began using their corporates, corporate staff members began suggesting that credit unions check out their bank account analyses so they could see the TRUE costs they were paying. It soon became clear the banks were making lots of money for their stockholders on the backs of credit unions.
A Light Goes On
Side-by-side analyses showed that services obtained from banks were far overpriced. While correspondent banks gave their community bank customers special pricing, nothing of the sort was offered to CUs. When it came to lending, credit unions received rates just marginally lower than what the banks charged consumer borrowers-if they lent to CUs at all. The same thing for investments: When credit unions had surplus funds, they earned rates barely better than individual members could earn on their own.
This realization was a major turning point for credit unions. Corporates began to grow exponentially in assets, as well as in expertise. The inventory of services CUs offered to their members expanded to virtually equal, and often surpass, services offered by other financial institutions. The vision that corporates would be able to offer higher investment rates and lower lending rates to their member CUs became a reality-all in a safe, efficient manner. Credit unions' corporate system became the accepted norm over the years, yet it was unique in all the country. No other segment of the nation's financial industry had anything close to it.
I think it truly was like a light switch. No one needed to talk about it; it just worked. Credit union board members may have heard of their credit union's corporate, but most had no idea of all the services it was providing. Millions of dollars a day in settlement activity. Millions more in daily transactions. Liquidity on tap when needed.
Then came the economic meltdown and near collapse of the nation's financial industry. Everyone was caught off guard: the White House, Congress, Treasury, national rating agencies, Wall Street, financial institutions and their regulators.
Now, credit union board members were learning about their corporates. They didn't learn about the great work of cooperation that created them, or the reliable, cost-effective services they provided for years. Instead, they learned about the devastating losses. And CUs that were members in the largest corporates offering the most services lost all of their capital investments. What happened, happened, so there's no point in looking back. But the services offered by corporates remain crucial to credit union operations. Daily settlement for payments and transfers, check processing, overnight liquidity, and short-term lending are still credit unions' life's blood.
Keeping The Light Burning
NCUA issued strict rules that allow corporates to continue to provide these required services, and CUs will need to decide if they want to have corporates by recapitalizing them. Think of it as the "electricity" flowing through the lights.
Only CUs can determine whether they are willing to invest in a corporate or look elsewhere for these vital services. Of course, many banks will be happy to take credit unions back-especially happy to get their lucrative balances back.
There will be those whose only knowledge of corporates comes from the recent losses. Others will realize we only have one CU movement, that it has worked well for many years, and we need to work together to keep it strong. I'm betting on those who know corporate credit unions represent more than turning on a light.
Dick Johnson is the former president of Western Corporate FCU, San Dimas, Calif.
