Letter: Too Big to Fail Corporates Will Lead to Industry Troubles
I have read with great interest recent articles on corporate credit union mergers and NCUA’s seemingly reversal of its “too big to fail” stance.
I am amazed that credit unions and the NCUA are willing to basically have the same corporate credit unions that cost credit unions so much money, and caused them diminished reputations, to have so much control over the credit union system again. Have we learned nothing? All the regulations in the world will not fix over concentrations. Does anyone really think the resurrected Members United and Southeast’s of the world will really not fall back into the same pattern of chasing rates and pressuring the NCUA for more authority when they cannot earn enough income from margins on correspondent services?
And what about these quoted consultants that have never been directly involved in corporate credit union operations? What expertise do they really have in this area? The consultants fail to fully understand that the larger corporate credit unions, with their larger infrastructures, cost more to run and end up being inefficient and actually lead to decisions to take more risk than smaller corporate credit unions due to the need to create more margin to support their infrastructure. Crazy isn’t it?
The recent false arguments of the economies of scale that is now driving the process are the same arguments that made WesCorp, Members United, and Southeast as big as they were and drove the investment decisions they made. It will happen again if we let this trend continue.
The recent talk of the smaller corporate credit unions merging as evidence of an inability to continue on their own is only a half truth. These smaller corporate credit unions kept true to the original corporate credit union system model of passing through products and services of a central, wholesale corporate (U.S. Central). The reason they are merging is the loss of capital caused by U.S. Central, and I can make a logical argument that the other Big Three had a direct cause in the actions U.S. Central took to boost income to give bigger returns demanded by these three corporate credit unions. Within the three-tier system, the smaller corporate credit unions did just fine.
Can credit union members of the old Big Three point to an example where when they took in merger partners for economies of scale that it lead to lower fees or better rate structures? No, they can’t because the economy of scale argument is a red herring used to push the natural credit unions to the Big Three again.
Don’t think for a minute that the remaining smaller corporate credit unions cannot survive under the new regulations; they have shown in the past that they can and they will again.
Douglas C. Wolf
Doug Wolf Associates