Fuzzy CU Math: Current Proposal Shifts Capital Around Instead of Building More
Call me naive or even ignorant but I fail to see how alternative capital, as currently proposed by NAFCU, and supported by CUNA, strengthens our industry. To me it seems to perpetuate the current capital shuffling from natural person credit union to corporate CU to US Central. When a true crisis occurs, the burden is shuffled down to the natural person credit union that didn't create the crisis and are damaged irreparably.
First and foremost, if credit union A invests in credit union B, what additional capital has been created to sustain losses? When credit union A fails, doesn't that bring down credit union B? This analogy is happening right now. When several credit unions failed recently in Nevada, a significant amount of their losses were comprised of capital invested at Wescorp. How many credit unions would not have been forced to merge if they didn't have to write off their investment in Wescorp? It's an interesting question that, until we have the answer to, we cannot fully define what the new corporate system should look like.
Second, who would invest in a credit union that, due to losses or excessive, un-managed growth, fails NCUA's capital requirements? Possibly members, but these are the same members that NCUA believes are not intelligent enough to vote on bank conversions. Are we to believe that they are now sophisticated enough to analyze financial statements and take a flyer on uninsured debt obligations? Another potential investor may be other altruistic credit unions that will put up funds in smaller credit unions but that just perpetuates the current problem of permitting non-competitive, small credit unions to survive beyond their usefulness. An industry is only as strong as its weakest link. We have thousands of small, non-competitive credit unions that survive only because NCUA does not hold them to the same regulatory requirements as larger credit unions.
To me, the only responsible way to deal with alternative capital is to open it up to outside investors so that when the next crisis comes it won't bring down the whole industry. Wescorp deserved to fail, but credit unions that were forced to invest in Wescorp to obtain services, did not deserve to fail. I do not know what this new, alternative form of capital should look like, but if this is the best we can come up with perhaps that explains why our industry is crumbling at the rate of 300-plus credit unions per year.
Timothy Richey, CEO
Columbus Metro FCU, Columbus, Ohio