One Reform on Which We Can All Agree…I Hope
Credit unions are like any other business. If they don’t execute a viable plan for continued growth, they are going to die. The only question is: How long they are going to linger?
Our current net worth requirements artificially cap credit union growth and hinder our ability to help our members. We need supplemental capital reform. No credit union should have to worry that by responsibly meeting member needs they are putting their financial health in jeopardy.
That’s why the single biggest reform that credit unions need today is not MBL reform, as important as that is, but rather legislation introduced by Long Island Republican Congressman Peter King, H.R. 719. This legislation would allow all credit unions to take in supplemental capital.
Thousands of Low Income Credit Unions can already accept uninsured capital from individuals or organizations that want to help them serve their communities or colleagues. This uninsured capital helps offset liabilities, such as sudden increases in member deposits. Not-for-profits already do this type of thing for low-income credit unions all the time, so why not allow them to do it for all credit unions?
Now one of the reasons I went to law school was because it became glaringly obvious at a very young age that I would not be taking over my father’s accounting practice. But even allowing for my general discomfort with accounting, the current net worth requirements imposed on credit unions make no sense. You literally get penalized for growing. As a result, there are credit unions that are better off turning away members who want their services than they are gaining new members.
To be sure, John Corzine and other Captains of Industry have provided ample evidence in recent years of why deposits have to be considered liabilities. Theoretically, there could be a run on your credit union tomorrow and you’d better be able to give people their money back. The problem is that since credit unions are already subject to the most restrictive investment constraints of any financial industry in the nation, gaining members is the only viable long term growth strategy. In addition, during times such as the one we are in right now when investment returns are lower than the approval ratings of Congress, credit unions need to be able to raise additional capital and supplemental capital is a responsible way of meeting that goal.
I’ve heard credit union people whose opinion I respect suggest that accepting supplemental capital represents a step away from the cooperative member driven structure of credit unions that ultimately distinguishes us from the for-profit banks that we are competing against. To address these concerns, the Congressman’s proposal would make supplemental capital subject to a requirement that it not alter the cooperative nature of credit unions. And even without this restriction where is the evidence that Low Income Credit Unions are less committed to the credit union movement because of supplemental capital?
The ultimate protector of the credit union cooperative structure is in our volunteer Board of Directors and the fact that anyone who has $25 or 2.5 million in a credit union has a single vote at the annual meeting. So long as secondary capital investors are not given the ability to dictate credit union affairs, our industry will always have the ability to prevent corporate conduct which doesn’t respond to the needs of members.
To me, whether a credit union has $1 million in assets or $1 billion it should be judged by how well it provides reasonably priced financial services and assists people of modest means. Supplemental capital would help all credit unions meet these baseline obligations. If we can’t make that case now, it’s hard to see when we will ever be able to.