State Governmental Affairs

National Conference of State Legislators

What Does Financial Modernization Mean for Credit Unions?
Wednesday, July 21, 2004 -- 8:15am to 9:45am
Salt Palace Convention Center -- Ballroom J, Lower Level
"Financial modernization" has become the buzz word for market-based financial regulation that promotes speed, synergies and ever-increasing efficiency. But what does it mean for credit unions? Some say that state and federal charters should be broadened to allow credit unions to keep pace with the changing financial marketplace. Others contend that credit union charters already have expanded the services that credit unions may provide to make them indistinguishable from retail banks. This session examines credit unions in the age of financial modernization.

I want to thank you for allowing me the opportunity to speak before the committee today. I really appreciate being able to discuss the future of an industry and movement that I believe in so deeply.

In my remarks, I’ll be talking about financial modernization from both standpoints as federal regulator and then as federal insurer. While the bottom line for both is the same, continued viability for credit unions in an evolving marketplace, I believe that each carries with it a different set of issues. Overall, I concur with Mr. Little’s general premise that credit unions need to continually evolve with the changing times to remain a viable choice for consumers. Expansion of powers serves those policies and certainly fits with the purpose of credit unions. For a credit union to be viable, it must remain relevant to its member owners, or else, they will simply go elsewhere for services. If a credit union loses too many members, it loses its ability to survive.

Safe and sound regulation of credit unions requires an assessment of the institutions future viability. Unlike financial audits that focus on the historical facts, examinations take those historical facts and project future actions. If regulators recognize a problem and then simply sit by and wait until a credit union has totally depleted it’s equity, we have been remiss in our fiduciary responsibility. We must be proactive in dealing with unsafe and unsound conditions as quickly as possible. Credit union viability is a key factor in providing the capital foundation and the time to deal with economic downturns or those unforeseen consequences arising from management decisions. Consequently, that makes viability a major safety and soundness concern for individual credit unions and the industry as a whole. From my standpoint, it can impact the vitality of the National Credit Union Share Insurance Fund, (NCUSIF).

When we use terms like viability and consumers right to choose, I’m not sure that they really convey the essence of what it is to be a credit union. Many people look at credit unions as just one more type of financial services provider in a sea of alternatives. I was certainly one of those people when I started my career with NCUA 18 years ago. But I had an experience in those early years, which gave me a glimpse of what the credit union movement is about. I’d like to take a few minutes to tell you that story and set the stage for what I see as viability.

I was working with a small troubled credit union whose field of membership was primarily federal and state government employees. They were coming out of a bad spell of loan losses, and were working very hard to get back on track. The primarily new volunteer board members were meeting two or three time a week, and often on Saturday mornings as they charted the future course for the credit union.

One week, after we’d already endured two marathon meetings and were leaving the credit union on Friday night to prepare for a Saturday training session, I had an opportunity to speak with the Board Chairman. This gentleman was a father of three, worked in the local post office, and had volunteered generously with his time to work on moving his credit union ahead. I asked him the simple question of “why”. “ Why do you put in all this time, get pulled away from your family, and take all the grief from your nasty regulator, (that would be me) when you’re not getting paid for it?” His answer changed how I viewed my job from that point on. He simply said, “Other than in credit unions, where is an average guy like me going to have the ability to chart his own financial destiny. I’ll never have a fortune to manage, only savings accounts. This place is where I can have impact on my own financial future and that of others.”

One member, one vote. This is a basic structure for federal credit unions and a very powerful one. Some members don’t take advantage of that power, some don’t even realize that they have it. But many do, and if you hear them talk about their financial institution it is usually “my credit union” rather than “the credit union”.

With that as background for my comments, let’s talk about viability. As with any organization, if you don’t evolve and modernize with the times, you get left behind. Speaking for myself, I want products that fit my life effortlessly, with better, faster service and for less money. I don’t think I’m unusual in today’s fast paced society, where your day can often be planned down to the minute with very little time to spare.

From a federal regulator standpoint, we see the need to establish a regulatory environment that provides flexibility for credit unions to meet the changing needs of their members in a safe and sound manner. That means writing our rules and regulations in a way that embraces risk management and that acts as a foundation for credit unions to meet their public policy purpose, providing credit for provident and productive purposes to people. To establish such an environment requires us to look to modernization of the laws and rules governing credit unions, because you all know that the financial services of the 1930’s were not the financial services of the 1990’s and will certainly not be the financial services of the 2030’s. With the continued intergenerational transfer of wealth we’ll be experiencing over the next 30 years, the ability to have services fit for the 2030’s is real for most of today’s financial service providers.

One of the very good things about our dual chartering system for credit unions, is that the natural constructive tension between the powers in state versus federal charters keeps both charters moving forward. In the current Federal Regulatory Relief bills, some of the issues NCUA is specifically pursuing for modernization break into two categories, safety and soundness and enhanced member service. Some of the safety and soundness provisions include:

1.) the use of a risk based net worth requirement for prompt corrective action purposes similar in concept to that used by banks and thrifts so that capital levels are commensurate with the credit union’s risk posture rather than one size fits all,

2.) We are requesting to change the definition of net worth from retained earnings to equity to allow for the merger of credit unions in the normal course of their business cycles,

3.) We are looking to increase the one percent investment limit for credit union service organization’s to three percent allowing more credit unions to partner together to provide back office support and services at lower costs,

4) We believe that expanding investment options to allow greater diversification and income producing opportunities will enhance credit unions safety and soundness;

5) We are looking to improve the voluntary merger options so that the need to break apart fields of membership is limited; Our experience has been that spin-off or start-up credit unions have a very tough time to be successful in today’s market because they simply do not have sufficient critical mass to put in place the products and services to build a self- sustaining member base.

6) Finally, we are looking to add examination authority over credit union vendors.

There are two provisions to provide better service to members.

The first would allow federal credit unions to provide check cashing, wire transfer and other money transfer services to individuals eligible for membership which would provide another vehicle to reach the “unbanked” in our country whose trust in financial systems may be limited; and

The second eliminates the outdated twelve year maturity limit on loans that don’t have a specific exclusionary provision allowing for greater credit union lending authority and an ability to reach more individuals.

These provisions will strengthen credit unions’ ability to provide low cost services to their members and the “unbanked” in a safe and sound manner. That ability is what will aid in keeping credit unions a vibrant and viable alternative for consumers well into the future. Consumers are the ones who benefit from having a wide variety of choices for their financial services. The competition keeps service providers on their toes, makes them think of new ways to serve their members, and keeps costs down.

There are proponents of the concept that at some magic size a credit union ceases to be a credit union and morphs into some other type of entity. Those proponents often see that other type of entity as being inherently evil primarily because they increase the competition. From my perspective, these larger credit unions serve the industry well and do so in a variety of manners. First, they often incubate new products and services and help tailor them to the credit union approach. Second, they have an even greater ability to reach out to the underserved and unbanked because of their ability to diversify the membership base. Finally, these large entities are almost always willing to lend a hand when another credit union is in need. With that said, the real bottom line is still one member, one vote. The structure doesn’t change with size and the members share in the wealth generated by the credit union rather than just providing it to others.

You’ve heard me use the word viability a lot so far. I’m sure by now that some of you may be asking yourselves, why is future viability for credit unions so important. Let me put on my insurer hat. All businesses and industries have a life cycle and maybe we should limit by law or regulation the life cycle in the case of these financial cooperatives by keeping their service capabilities as a fairly simplistic level. I’m sure all of you have heard the comments about “leveling the playing field”. Well, earlier I spoke of my biases in favor of credit unions. Now, I’d like to talk about my duty, both fiduciary and morally, to the American people I serve. I don’t buy into the “level playing field” argument, for a multitude of reasons. First, I don’t believe in the real world that any playing field is level. I’m 5’2”, there are many jobs, avocations, and pleasure activities that are simply out of my reach. That’s reality. Second, I don’t see a lot of other financial institutions clamoring to convert to credit unions. If credit unions have such a good deal, why don’t we see that movement of smart business entities? In fact, what we see is movement the other way instead. But the real reason I don’t buy into the “level the playing field” argument is that the consequences for many of the proposals places greater systemic risk on the National Credit Union Share Insurance Fund. A fund that I very jealously guard to make sure that the American people I serve are not ever required to bail out our system. For me, future credit union viability enhances our ability to manage risk to the share insurance fund by allowing credit unions to build their equity levels through having a vibrant operation. The only way credit unions can build equity is to earn it, they cannot buy it. As with any company, to earn that equity, the owners of the credit union must forego dividends on their shares. Those earnings are then retained and build in the strength for the institution to weather any economic storms that come their way. It also provides the start-up funding for new products and services to meet the member owners’ needs.

I know I must sound more like a credit union evangelist than a regulator/insurer. But I live credit unions every day, both the good and the bad. I see credit unions growing and expanding, providing a much needed alternative for consumers that also provides them the opportunity to participate in a democratically controlled financial services provider. I see them working with the underserved areas, reaching out to the “unbanked” and disenfranchised to let them see what our stable financial system can bring them. And, I see those fortunately few, that have outlived their viability and desires of their members. These are credit unions that were unable to evolve and keep up with the times and subsequently became irrelevant in their owners lives. And some of those that have outlived their viability cost the National Credit Union Share Insurance Fund money to dispose of the remains. For me, that is the bottom line on what financial modernization means to credit unions, their owners, and ultimately the tax payers in this country.

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