One Option To Consider: No Corporates At All
Thank you for opening the dialog on the future of Corporate Credit Unions (CU Journal, April 12). The three choices you presented included having a single national corporate, five regional corporates and the status quo. I would add to those three choices the option of not having any corporates.
I think a future without corporates would be very bad. I have been at SAFE CU for over 30 years and I have learned that credit unions don't manage investments very well on their own. The corporate system has incurred huge losses. We will never know if those losses would have been avoided if credit unions invested on their own. I would guess that if credit unions had invested on their own the losses would have been substantial. In the years before corporates held the largest share of credit union investments, credit unions were often the victim of bad investments. Credit unions suffered big investment losses with GNMA investments, Pen Square Bank, Common Trust Investments, and scores of other bad investments.
I think the credit union system as it exists today would be better served if we had a corporate credit union system. The very largest credit unions, those above $5 billion in assets, probably have the expertise and a large enough investment portfolio (over $1 billion) to justify investing directly without using a corporate. But most other credit unions do not have the investment expertise or a big enough portfolio to justify investing on their own.
I would prefer a corporate credit union system that is linked and has regional corporates. I think there are regional differences that would make regional corporates more in touch with the needs of their credit unions. The board representation for corporates is very important and we should have a close link between the Board and the member credit unions. I think regional corporates would achieve that end. I do not think we need more than five regional corporates, just as we don't need more than five NCUA regions.
Unsound Option: Having So Many Small Corporates
I think it would be unsound to continue having so many small corporates. Many of the corporates are smaller than the largest natural person credit unions. These corporates do not have the scale or efficiency to be wholesale investment alternatives for credit unions.
Capital is another issue that argues for fewer but bigger corporates. Larger corporates that have the same capital-to-asset ratio as a smaller corporate have a larger absolute amount of capital. Larger corporates have more capital given the same capital ratio. Size offers other advantages. I don't have statistics for corporates but in natural person CUs there are clear economies of scale. Larger credit unions are more efficient than smaller credit unions. I fully expect that would the case with fewer but larger corporates. Many of the small corporates have very few staff members. Smaller staff sizes limit segregation of duties; limit the amount of expertise available; and limit the amount of support available to members.
The Federal Home Loan Bank system offers a good business model for corporate credit unions. Ideally Congress would give corporate credit unions the ability to issue bonds that would support consumer lending and small business lending so that credit unions can be the premier local financial institution. Congress would get far more for that investment than by using left over TARP funds to encourage lending by community banks. Community banks do a fine job but credit unions would do an even better job.
The old business model of making a spread off investments and using that income to pay for other all other services will have to change or corporates may have problems again sometime in the future. If corporates could be a funding source for credit unions rather than the other way around it would be better for both credit unions and the corporate system. If credit unions had an alternative source of liquidity besides just member shares, it would allow credit unions to be a realizable source of credit for members in every economic cycle. It would also mean that corporates would have interest on loans in addition to interest on investments as a source of income. Loan rates are usually higher than investment rates. The spread between loans and the funding costs of FHLB bonds has provided the FHLB bank system a more secure means of building capital and a more secure earnings stream. We need that in the corporate system of the future.
The Federal Home Loan Banks require capital contributions from their members and that is how we will have to support any new corporate system. Corporates will have to pay a reasonable return on that capital and owning capital should be a requirement to obtain services from the corporate.
Henry Wirz, President
SAFE Credit Union,
North Highlands, Calif.
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