Oh, What a Tangled Web CUs and Regulators Weave
Credit union executives are in this hurry up and wait mode when it comes to corporate services. Credit unions are being encouraged not to bail out of their corporates, even the NCUA-created bridges over troubled waters, yet they have to be ready to leave when the time is right. Jump too soon and the legacy asset plan crumbles into the murky waters; not prepared when the time comes and your CU could be up a creek without a paddle.
What I'm surprised about is the timidity of many of those vendors that could replace corporate services. Significant changes to the corporate credit union system have been a fait accompli for at least 18 months. Credit unions and others have been wondering and waiting what they're going to do next. Some moved away from corporates early, while others simply made just-in-case plans. When we wrote about potential corporate credit union alternatives, some were very touchy about it. Symitar was compelled to write a letter to the editor clarifying what we already written they weren't going after corporate clients. We quoted the company's spokesman saying that.
No one wanted the corporates to go under before a least-cost solution was mapped out because that would have devastated the natural person credit unions vendors compete for. In most industries, others would be swooping in like carrion-devouring birds on the clients of WesCorp, but not many did-at least not publicly.
In the bigger picture though, credit unions will need investment, liquidity and processing services. Some will choose the recapitalize their corporates or others. Don't lump all the corporates together because of a few bad apples that pushed the envelope too far. A handful are chugging along relatively strongly and have a plan to push on to success under the new framework. There's still a role for corporate credit unions.
But others were quiet about stepping up to help credit unions during this time period. Like Symitar, they may have had corporate credit union clients. If not, the vendors certainly had natural person credit union clients that would have gone down with the corporates had the worst-case scenario occurred because others with similar services to the corporates were stealing credit unions away.
Of course many credit union vendors are credit union-owned CUSOs. Political and practical matters had to be particularly sensitive in those shops. Shortly after the NCUA announced its corporate reg, legacy asset plan and conserved another three corporates, CO-OP announced a new product to assist credit unions will eventually move away from corporates, as did TMG.
In a free market society, you expect the strong to exploit the weak but no clamor happened. Why? It's the boon and bane of a cooperative industry that is interlocked like the chain for my grandmother's dog became in the huge maple beside her house. No matter how much I tugged with my 10-year-old muscles that thing was holding tight.
Perhaps I shouldn't be so na?ve, but I was literally shocked when talking to a consultant last week who said the majority of credit unions didn't realize the entanglement of the credit unions, corporate credit unions and the NCUSIF until the corporate meltdown occurred. Corporates' capital comes from credit union funds. That capital serves as a buffer to financial ruin and, naturally, the NCUSIF.
Wait a second, credit unions fund the NCUSIF through their 1% deposit and assessments. And that 1% is also counted as capital on the credit union's books. Folks, it's all the same small pool of funds! It's been the bankers' point all along that the credit union industry is, well, incestuous. Previously the double counting of the 1% partly held up capital reform.
The lack of understanding was painfully highlighted when some asked for a wall between the corporates and the NCUSIF. The missing barrier is by design because credit unions are cooperatives with a cooperative insurance fund.
Now as some are ranting about the corporates, credit unions are looking at launching CUSOs for these services instead. Throw capital in a redesigned corporate or a CUSO, it's all the same-except for one thing: CUSOs are not federally insured with loss expenses spread across the entire credit union community. That's great because nonparticipating credit unions would be protected, but if a CUSO fails, only the owner credit unions are left to foot the same bill. There's a much greater potential for loss to those owners.
While all of this seemed very academic three years ago, the reality came hammering down on credit unions in the current crisis. All of the potential service models have costs and benefits. Understand what your credit union is getting into.
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