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The ‘Death Knell’ of the CU Movement?

Lack of access to alternative capital could have serious consequences for CUs.

September 02, 2010
KEYWORDS capital , credit , earnings , unions
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Could lack of access to alternative capital sound the “death knell” for the credit union movement?

Jim Updike thinks it could. The CEO of $524 million asset Honda Federal Credit Union, Torrance, Calif., presents this scenario:

Large, sophisticated credit unions will recognize they need more capital to grow and serve members. The current way credit unions build capital, through retained earnings, takes too long in a low-earnings environment.

Subscribe to Credit Union MagazineThis hinders growth, the introduction of new services, technology investments, and other improvements.

As a result, these institutions will conclude the credit union charter no longer meets their needs and will seek alternative charters—mutual savings banks or stock institutions.

The smallest credit unions will retain this charter. But before long, capital constraints will cause them to merge or otherwise cease operations.

So much for trade associations and regulators—no need for them in a quickly contracting industry.

That’s it. Curtain closed. No more credit union movement.

“If you want an example of this, look at the savings and loan industry,” Updike says.

Alternative, or supplemental, capital could allow credit unions to raise money from outside the institution and use it as a capital buffer, explains Mike Schenk, vice president, economics and statistics, for the Credit Union National Association. It could take three forms: voluntary patronage capital, mandatory membership capital, and subordinated debt.

U.S. credit unions, besides those with low-income designations, are among the only financial institutions in the world lacking access to capital beyond retained earnings.

Fallout from the economic crisis has brought the issue to the forefront. “Credit unions haven’t been immune to the economic downturn,” Schenk notes. “Some credit unions, especially those in the ‘sand’ states—California, Florida, Nevada, Arizona—have come under a great deal of financial strain through no fault of their own. And now, many are recognizing a need to rebuild capital. That can be a time-consuming process, especially when earnings are low and when assets are growing.”

Gaining access to alternative capital would require congressional action—no easy task. But it’s “certainly within the realm of possibility and it’s something we’re fighting very hard for,” Schenk says. “It makes good public policy sense to increase the safety and soundness of the credit union system without asking the taxpayer to chip in. Taxpayers already have paid a high price to help bankers out of the mess they created.”

“We’ve seen very little growth in credit union market share during the past 20 years,” notes CUNA President/CEO Bill Cheney. “To remedy that, capital reform will have to be one of our top priorities. We have to be able to define our own future.”

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Shifting blame?

Jeffry Pilcher | TheFinancialBrand.com
September 05, 2010 10:18 am
Is it really accurate for CUNA's economist to say credit unions in California, Florida, Nevada and Arizona are suffering through "no fault of their own?" Really? These struggling credit unions didn't stretch themselves too thin by making riskier loans than their peers? There are perfectly healthy CUs in each of the four "sand states," and in almost every instance, these credit unions are thriving because of the prudent decisions they've made vs. "no fault of their own."


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Response

Mike Schenk
September 09, 2010 3:53 pm
Jeffry: Your summary doesn't accurately reflect my comments in the magazine. I didn't say that "credit unions in California, Florida, Nevada and Arizona are suffering through 'no fault of their own." I said that "Some credit unions, especially those in the sand states - California, Florida, Nevada, Arizona - have come under a great deal of financial strain through no fault of their own." Did any credit unions "stretch themselves too thin"? Obviously. Did any credit unions make mistakes? Yes. But on balance, most credit unions remained relatively conservative, and stuck to the pro-consumer model that has served the movement and its members so well over the past century. At the same time, unprecedented declines in real estate values caused undeniable strain for many credit unions. This is true for many credit unions with no real estate holdings. True for many that made "prudent decisions". And true for many – both inside and outside of the sand states. While it may be generally true that perfectly healthy CUs are thriving because of prudent decisions they’ve made. It is unwise to suggest that only thriving credit unions made prudent decisions. And equally unwise to suggest that all or most of those that are not thriving made imprudent decisions.


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Capital pressure vs. Mortgage holdings

Jeffry Pilcher | TheFinancialBrand.com
September 09, 2010 4:17 pm
When you say "great deal of strain," I hear "capital pressures." I recoil when I hear implications that financial institutions with capital strains aren't largely culpable for their own predicament. Are there any credit unions in these sand states who don't have any mortgage exposure but are suffering nonetheless?


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