There may be no more contentious question in the typically placid world of credit unions than this: How many corporate credit unions are needed to keep the system smoothly functioning? And that leads to the allied question: Do we need any corporates at all?
The second question is the easier to answer. "There is a lot of anxiety around the question of corporates," said Fred Becker, CEO of NAFCU, who insisted it is crucial for natural person credit unions to at least contemplate how they could get their business done without making any use of corporates. "Can you do what you need without them? Can you work with the Federal Home Loan Banks and the Federal Reserve?"
Becker was not advocating that credit unions jettison corporates so much as he was urging every credit union "to look at the alternatives. I am saying they should consider diversification and they should choose what is best for them."
The plain fact is that corporates no longer can assume member support. Ill will about money lost in the past few years is rampant among natural person credit union executives. Others are skittish about throwing good money after bad.
"A lot of credit unions are waiting for their corporate to come out with a survival plan. Then they will decide whether or not they want to support the corporate," said Robert Fouch, president of Corporate Central Credit Union in Muskego, Wis. Fouch, incidentally, noted that his corporate lost $73 million in the US Central meltdown. "That was 27 years of earnings. We will not recapitalize another entity like that."
But, hesitations aside, nobody expects corporates to vanish, not in 2011 and the near-term thereafter. The NCUA has been plain in its endorsement of corporates. In a mid-February policy statement, signed by Chairman Debbie Matz, the regulator unambiguously said that it "continues to believe that a member-driven approach will provide the best solution for meeting member payments and liquidity needs."
"Corporate credit union members should work with their respective corporates and chart a strategic direction to ensure continuity of service to the credit union industry," the statement said.
Purely from a perspective of processing paper (or digital bits and bytes), corporates could easily be replaced. That business–correspondent services–has been commoditized, and it now is easy to source at increasingly low prices. This is not a place for corporates to build an enduring future.
But there is more to a corporate than just correspondent services. Said David Savoie, CEO of Louisiana Corporate: "I was taught that the reason corporates exist is to provide a source of liquidity to credit unions. Correspondent services can come from elsewhere. But there is no substitute for corporates when it comes to sources of credit for credit unions. I feel very strongly about this. Banks do credit lines different than corporates do. They will be quicker to cut your credit off."
Put another way, should credit unions depend on banks to get their work done? The prevailing sentiment in the credit union community is no, they should not. Which leads back to the first question: How many corporates should exist?
The corporates that survive will be ones that have deeply rethought what services they provide because nothing less than a radical re-examination of business fundamentals will point today’s corporates to survival. Said Paul Schaus, president of CCG Catalyst, a Phoenix-based consulting firm, "The number of corporates will continue to shrink, consolidation will continue for several more years, but we are not getting to see, say, 10 corporates anytime soon."
But, said Schaus, he would not be surprised if we end the year with 25 corporates, down from 31 early in 2011. "The corporates that remain will have to become much more efficient and that means more consolidations."
Simply surviving this year’s NCUA liquidity and asset tests will not be sufficient to guarantee survival, said Schaus. Corporates that prosper will know "their business model has changed. And they need to be there for their members. Go back to the roots. Corporates exist to provide members with services the members cannot easily do for themselves."
Do that and quite probably, suggested Schaus, there will be room for a couple dozen healthy corporates for some years to come.
Should the NCUA simply decree that there will be a certain number of corporates, no more, no less? Becker, for one, is vocal in his opposition. "Some people want to tell us how many corporates there should be. I am not in favor of that. I believe in the free market. It is messy but it works," he said.
"I don’t know what the magic number should be, I don’t know that anyone does," agreed Fouch. He added that he was skeptical that restricting the number of corporates–say creating a parallel universe to the 12 Federal Reserve banks, an idea that has been floated–makes sense. "I don’t know that would bring about the results people want," said Fouch.
But whether it is the free market or regulatory fiat that sets the number of corporates left standing, one last issue remains. Who is responsible for the success (or failure) of the corporates that survive? For Schaus that question is easy. "Credit unions forget. They own the corporates. They are the watchdogs. They drive the success or failure."