Corporates' Market Share Plunges to 30-Year Low
The corporate credit union market share in 2007 was about 20%. As of July 2010, it was down to 7.7%.
"That share is at a 30-year low and indicates that credit unions are vacating the corporate credit union system en masse," said Charles Felker, managing director of regulatory services at First Empire Securities Inc. and managing director of Balance Sheet Management and Consulting Services Inc. "What's happened during this period of time to accelerate the exodus of this, if you will, was the corporate meltdown. That served to accelerate the exodus. If you wanted to go back about 20 years, corporates held almost 50% of the investments of credit unions. This is my own personal recollection."
Felker, who also served as a former NCUA chief investment officer, said that the gradual loss of market share is something that has been in the works for many years but has accelerated in recent years.
"Credit unions could invest directly and avoid competitive yield," Felker said. "The gradual market share over time made them take on additional risk. Risk builds over time. That was the case. The risk of the corporate portfolios was building over time. That was a response to the realization that the system was losing market share. That's really what this is all about."
Felker expects it to stabilize at the current levels.
"What could happen is that the surviving corporates-the ones that were operated on a more conservative plane-may actually gain deposits," he said. "They stand to benefit to some degree, I think. How much, time will tell. There are several out there that do meet or will meet the capital requirements, and they may benefit. But overall, while some may benefit, I don't see the overall of investables rising. I don't see it rising from here because I don't see them being broadly competitive as investables, and they function as liquidity and payments solutions providers. That's what NCUA wants of them-those that remain."
According to the NCUA, the total corporate market share for the period ending Aug. 31, 2010 was $89.7 billion. For Dec. 31, 2009 it was $98.0 billion, and as of Dec. 31, 2008, it was $79.8 billion. But in Dec. 31, 2007, it had been $111.8 billion. The NCUA said it cannot predict what the share balance will be in the future. CUNA said it could not comment, because they do not track market share for the corporate credit unions, and are not predicting anything for the future because of the state of change corporates are presently experiencing.
"Why did corporates lose market share?" Felker asked. "Because credit unions could invest directly in capital markets and earn comparable or even better returns. Some folks may ask why that was."
Felker explained it was because the credit union system was three-layered, with U.S. Central at the top, corporates in the middle and natural person credit unions at the bottom.
"In theory, corporates were used to aggregate credit unions' funds, and in turn U.S. Central was supposed to act as a depository for corporate credit unions," he said. "The idea was that through this aggregation there would be larger funds that could be invested by U.S. Central and the return would be enough to sustain corporates and credit unions. In theory, it was supposed to work that way, but in reality if you think of the system as a three-layer cake, and you think of spread as frosting, there wasn't enough frosting to cover all three layers. You could say the system was economically flawed in that respect. So corporates began to invest by bypassing US Central."
Felker said that once the corporates began to compete with U.S. Central, they then had to take on additional risk.
"Corporates and U.S. Central were competing against each other," Felker said, "because NCUA granted them national fields of membership, which proved to be a disastrous policy. NCUA was hoping that there would be consolidations. There were some consolidations but it came at an awful price. NCUA should have foreseen that this would have resulted in a dislocation of funds in the system. That there would be rate competition, and corporates would have to take on additional risk, which is exactly what they did.
"To me it's pretty simple. I think any knowledgeable person that's been watching these developments over any period of time would agree with my analysis. I have been observing corporate credit unions since the 1970s. I spent 20 years with NCUA. I submitted Members United's charter papers. I have had the opportunity to watch this system over a long period of time."
Felker explained that the first corporate credit unions were organized in the 1970s, and at that time interest rates were still regulated. Beginning in the 1980s, the government deregulated interest rates, he explained.
"So there was more competition between financial institutions," Felker said. "To some extent, corporate credit unions were adversely affected by deregulation. The three-tier system was envisioned in a period of regulation. The spread of what they could pay in spread was locked in. You didn't have this rate competition. And to make matters worse, for many, many years the policy at NCUA was not to object to a credit union placing all of its surplus funds in a corporate. The rationale at the time was that NCUA regulated and supervised the corporate CU system. So if you go back 20 years, you would find that NCUA's policy at the time was not to object. That policy began to change after Capital Corporate failed in 1994. Following that failure NCUA revised its regulation, and it began to move away from the policy of not objecting to a credit union putting all of its surplus funds in a corporate."