Economic crises boost CUs’ significance

In an era of historic credit and budget deficit crises and a global recession, credit unions’ relevance may never be stronger, John Lass, CUNA Mutual Group senior vice president, strategy, told attendees of CUNA’s America’s Credit Union Conference & Expo on Monday.

“There’s no doubt that spread pressures, corporate stabilization expenses, and potential regulatory oversight changes are stressing credit unions,” Lass said.  “But credit unions’ many strengths not only make these obstacles surmountable, they pose an opportunity to shine even during one of the worst economic downturns in the nation’s history.”

Further strengthening the credit union charter’s relevance is the plummeting image of banks and their role in the country’s economic collapse, Lass said. “For the most part, credit unions avoided the subprime and related mortgage lending practices. Credit unions didn’t cause this crisis, but they have been caught in its backwash.”

Lass said image alone isn’t why the credit union charter is needed now more than ever and gave these reasons why credit unions are in a position to make gains with consumers:

• Local presence/funding. Credit unions’ loanable funds are primarily through deposits, not the capital markets like at banks and finance companies.
• Cooperative ownership structure. Member ownership makes it difficult for any outside group to exert undue influence on the strategic decisions, unlike banks. For example, there has been a significant infusion of capital in banks from sovereign wealth funds recently.
• Affordability. Credit unions provide affordably priced financial services, which is important to consumers now more than ever. According to CUNA research, credit unions provided an average benefit of $170 per member household over banks.
• Concentration. Although the credit union system has experienced concentration of deposits in recent years, it’s not nearly as concentrated as the banking industry. The top five bank holding companies hold 38% of all domestic deposits, while the top five credit unions hold 9% of all deposits.
• Capital. To date, credit union losses have been managed from within the system, and the industry as a whole is well capitalized: Credit unions, 10.8%; banks, excluding TARP, 7.6%.
• Lower risk. The cooperative structure does not require excessive risk-taking. Credit unions’ delinquency rates and net loan charge-offs are significantly less than banks.
• Compensation/risk. Compared to the “asymmetric” incentives applied in the investment banking industry, credit unions’ compensation does not reward excessive risk-taking.
• Consumer loyalty. Credit unions’ member intimacy is almost impossible for a bank to emulate. “Customer intimacy is considered the most powerful value proposition an organization can build. It fosters the longest-lasting relationships and allows an organization to anticipate its customers’ needs.”
• Consumer trust. Independent surveys consistently rank credit unions high in consumer trust compared to banks.
• Purpose. The current economic crisis is the same type of environment that brought about federal enabling legislation for credit unions in 1934.