A recent seminar at the American Enterprise Institute, "Credit Unions in the Broader Financial System," illuminated a basic misunderstanding about credit union capital, or net worth.
Credit union net worth was contributed by the member-owners who started the institution. It was built up by those who have used the institution's services. It is supporting those members using the credit union today, and it will be employed to provide services to future members. They receive their "equity distribution" primarily through lower loan rates, higher savings/investment rates, and lower fees. This can range from hundreds to thousands of dollars per household a year.
There may be a rare occasion when a credit union genuinely needs to convert, because its long-term operating focus (e.g., business lending or high mortgage concentrations) is at odds with National Credit Union Administration regulation. However, the membership as a whole is almost always better off under the credit union charter.
With over 96% of thrift assets supervised by the Office of Thrift Supervision in stock-controlled institutions, and more apparently headed in that direction, credit unions are realistically the only mutually owned charter option remaining with the motivation to act solely in the best interests of the consumer.
Credit union net worth is cooperatively owned by the membership; it does not need to be divisible. Members who close their accounts do not receive, nor do they expect, a distribution of net worth. Credit unions have a different ownership model from stock-owned banks. That difference provides a healthy diversification to the financial system.
Some of the participants in the seminar advocated easing regulations for notifying members regarding the effect of converting from credit union charters to mutual thrifts and then, almost inevitably, to stock-owned banks. They argued that members of credit unions could purchase the stock in the converted bank or holding company.
Over 52% of the credit union members I serve for Truliant Federal Credit Union live in households that earn 120% or less of the median income for North Carolina, or around $47,000 for a family. As working Americans, they may own stock in their 401(k) plans at work but would not consider themselves "sophisticated investors" and would not be likely to buy individual stock. They also generally lack the funds to purchase any significant amount of stock.
The advocates for easing regulations, on the other hand, represent firms that earn millions in fees from conversions and take positions worth millions of dollars in the stock of the converted institutions. If their agenda succeeds, the ongoing "equity distribution" to members through services will likely dissolve once the institution becomes beholden to the drive for profits and stockholder returns.
Since a simple majority of the members who actually vote in a conversion election - without a reasonable quorum of 20% or more - can carry the election, a few individuals who often stand to gain the most financially can, in effect, remove the ownership rights of the many.
Credit unions are a modest yet particularly viable and vibrant part of the financial services sector. They may not show profits or grow at the same rate as their for-profit counterparts; they are not intended to mimic that business model. Credit unions generally are strong and well capitalized, exhibit a low-risk profile, and act in the best interests of their member-owners.
Sound public policy will promote an effective role for their regulator in the oversight of communication to the full membership regarding the effect of conversions.
