Forty years ago, credit unions created something that actually turned out to be a miracle: the corporate credit union system.
Of course, they didn’t know it would be a miracle in the beginning. They created something out of nothing ever seen before in the financial history of our country–a wholesale financial entity created for service, not for profit. The leagues and CUNA were the prime movers of this initial effort. Without them, it might never have happened.
In the early ’70s, virtually every CU in the nation had a bank account. The banks gave reasonable service and earned significant profits from this arrangement. When credit unions needed to borrow, they borrowed from a bank or savings and loan. When they had money to invest, they most often invested it with a bank or S&L.
But for credit unions, there was a flaw in this system. Banks dealt with other banks as other financial institutions, giving them special rates for doing business with them. Yet they treated credit unions like any merchant on the corner.
They did offer free checking as long as the CUs kept their nonearning balances with the banks. Of course, the banks earned far more on those balances than it cost them to offer free checking.
After CUNA and the leagues created corporate credit unions, corporate staff members saw how the banks were handling credit union customers, and they began to educate credit unions. They suggested credit unions ask for a monthly bank analysis of their account. Many banks resisted; they didn’t want credit unions to know about their big profits from their business. But it didn’t take long for credit unions to realize they were enriching bank and S&L stockholders.
Perhaps more than any other factor, realizing the scope of bank earnings propelled the growth of the soon-to-be massive miracle we call the corporate credit union system. As credit unions began to shift their daily balances to their local corporate and receive hard-dollar earnings, corporates began to grow and add services. This allowed credit unions to earn higher rates and borrow at lower rates.
As the years passed, most corporates were offering virtually every service offered by a bank or other financial organization. They worked hard to hire the expertise needed to assist member credit unions as the complexity of credit unions’ needs evolved.
After all, that’s why corporates were created: to serve their member credit unions. Nowhere else in the world were there organizations whose people started the day asking, “How can we make things better for credit unions today?”
Daily, more than $4 billion moved through the corporates in a safe, secure and mutually profitable system. In turn, credit unions could offer higher investment returns and lower borrowing rates to their members, rather than feeding bank stockholders.
It truly was a miracle.
But the very efficiency of the system created one problem that would come to haunt us. It functioned so well that credit unions became complacent. They didn’t have to think about it, and in fact, many board members never understood why this system had come about or what drove its success. How many people really reflect on something that works fine, like the air we breathe or the light that comes on with a flick of a switch? This complacency caused a problem.
When the national economy began its meltdown a few years ago, who could have predicted it? President Bush in his book, Decision Points, wrote he was caught by complete surprise. The Federal Reserve, Treasury, AIG, Lehman Brothers, Wall Street, private investors, the rating agencies, the NCUA and nearly everyone else had no idea what was coming or how severe this economic downturn would be.
Can anyone reasonably conclude that the staff at U. S. Central or the corporates should have been more prescient than our nation’s leaders or the most respected financial professionals in the country? All recriminations aside, what happened, happened. The issue now is, “Where do we go from here?”
Some credit union boards, not understanding the miracle credit unions created in establishing corporates, have stated that after losing so much capital, they absolutely will never support any new corporate. Their mindset is like one involved in a devastating car wreck who declares, “I'll never get in another car!”
The NCUA acknowledges being caught unprepared, just like everyone else. The NCUA also realizes it did not (and does not) have the budget to hire the expertise to oversee the huge, highly technical, complex credit unions called corporates. No one’s fault.
But after meticulous and extensive study to create new guidelines, new methods and new oversight procedures, the NCUA has finally approved some conserved corporates to start again if credit unions support them, as Chairman Matz has said. It is vital that we do so. We need to recreate this system to provide the crucial credit union-focused services that are needed, and do it in a way that absorbs the lessons of the past few years.
Despite the difficulties we have weathered, the eternal questions of yesteryear are just as valid today: “Why should credit unions pass on any profits to bank shareholders instead of their own members?” “Why would we want to give our business to any entity that, frankly, hopes we fail?”
Of course, without the support (and volumes) of larger credit unions, it will be cost-prohibitive for most small credit unions to continue. But my bet is that most of the large credit unions know we are in this together. And I am optimistic that those that are forward-thinking will support a credit-union-based solution.
It is time to recreate our miracle.
Richard M. Johnson is former president/CEO of WesCorp.