Recently the Credit Union National Association came out loudly against the Treasury Department's plan to reform regulation of the financial industry, saying it is bad for consumers.
However, the Treasury's proposal does preserve the non-stock-cooperative charter. So I just do not see what consumers would be losing by eliminating some attributes of a separate credit union industry.
Approximately 50 credit unions have determined that a bank charter conversion is well worth the price of surrendering their tax-exempt status. Moreover, executives are not united on the need for the National Credit Union Administration and a separate insurance fund. If others could easily switch to the FDIC, there would be a notable exodus from the NCUA fund.
The first reason is financial. The National Credit Union Share Insurance Fund requires all insured credit unions to invest 1% of their deposits in a no-interest account. However, the money earns interest for the NCUA and the fund.
The FDIC has no such requirement. For example, the $1.4 billion-asset Community Credit Union in Plano, Tex., (now ViewPoint Bank) had $9 million on deposit at the credit union fund that was refunded after its 2006 charter conversion. In contrast, a current credit union, such as the $33 billion-asset Navy Federal Credit Union, loses revenue on at least $193 million of its funds.
In a good year for the industry, some of the fund's earnings can be rebated to insured credit unions, but the NCUA recently let it be known that 2007 was not one of those years.
Second, should it be necessary to solve any systemic credit union problems with a bailout, a credit union is putting all its net worth at risk.
Third, the NCUA uses over 50% of the earnings from the credit union fund to support its budget. With half of all credit union deposits, state-chartered credit unions complain they are subsidizing the supervision of federal credit unions, creating a competitive disadvantage. State-chartered credit unions also must pay state regulators' annual supervisory fees.
Finally, credit unions serve broad communities with multiple asset categories. Historically, the NCUA has been a regulator of credit unions making small consumer and car loans. It has neither the history nor the experience to supervise complex real estate and other commercial lending activities, the fastest-growing asset categories.
This lack of experience is directly related to the problems we are reading about these days in the credit union industry. Recently four credit unions, all five times larger than the average, were put into conservatorship, creating unprecedented losses for the credit union fund. Numerous others are being quietly merged. Over 1,000 credit unions reported losses for last year, and the industry earned less that 35 basis points, despite its tax-advantaged status.
It is sometimes said that the NCUA is a "cheerleader" rather than a regulator. Supervising both the chartering function and the safety and soundness of credit unions brings back memories of the Home Loan Board and the savings and loan crises. This is a problem that should be addressed before history repeats itself. Few would argue with the proposition that the thrift industry is on sounder footing today because its deposit fund and some aspects of its regulation have been consolidated with the FDIC.
The need to solve the near-term financial crisis may provide a unique opportunity for policymakers to solve the longer-term problem credit unions pose for the financial system. Without action on the Treasury's plan, the credit union charter would remain plagued by obsolescence, since there is little chance the long-pursued "improvements" of the Credit Union Regulatory Improvements Act are ever going to see the light of day.
Phasing out the NCUA would benefit credit unions and communities, because it would provide credit unions with a safety-and-soundness regulator that is not preoccupied with preserving the status quo. The NCUA continues to promulgate regulations designed to make conversions expensive and thus contain the industry and preserve its revenue. Because of the imposed hurdles, many credit union executives have deferred conversion to FDIC deposit insurance.
In the aggregate, $700 billion of credit union assets make up a significant part of the community banking industry, and it is too risky to the entire financial system to allow a "cheerleader" to regulate an increasingly complex industry. In addition, as we have already seen, credit unions are not going to escape the current credit crisis.
At some point Congress will act on the Treasury's proposals, which, in many respects, reflect the recommendations of past administrations. Why not now?
