No Good Deed Goes Unpunished
Credit unions have a long and rich heritage of serving as trusted financial intermediaries for Main Street America. But the overwhelming burden of broad-stroke financial regulations and their attendant compliance costs have severely threatened credit unions’ ability to do what they do best, driving economic growth and stability in their local communities.
America’s policy makers seem unaware of the adverse relationship between the policies they have created and the economic vitality that credit unions bring to their communities. In an attempt to de-risk the banking industry, stabilize the economy, create jobs and protect the consumer, our post-crisis policies have undermined all of these areas while creating a growing disconnect between Wall Street excess and Main Street responsibility.
It’s a simple equation: 70% of U.S. economy is consumer spending, which is strongly correlated with jobs and employment; 65% of new jobs are created by entrepreneurs and small business; and 60% of the loans to small businesses come from Main Street banks and credit unions. Main Street institutions also disproportionately provide loans for houses, autos, education and basic credit that support the national economy.
But today, the community-based financial institutions that had little to do with the subprime crisis–who entered the crisis better off, with higher capital, lower charge-offs and lower default rates than Wall Street banks–exited worse off because of sweeping policies that reduced their income and raised their costs, placing the viability of many credit unions in jeopardy.
Policy makers seem oblivious to the disadvantages credit unions face in complying with the demanding regulations introduced since the financial crisis. Historically, the cost of regulatory compliance as a share of operating expenses is two-and-a-half times greater for small financial institutions than for large ones. Additionally, while large banks have extensive access to capital and numerous sources of income to cover increased compliance costs, credit unions have limited access to capital and considerably fewer sources of income, as they focus on the basic needs of their communities.
It is no surprise that credit unions are under enormous pressure despite exceptional satisfaction rates and membership growth. For credit unions, spending on regulatory compliance comes at the expense of channeling savings back to member-owners and providing loans to help create and grow small businesses. It also diverts time and attention from serving members, which is what credit unions are designed to do. By raising the cost of compliance for credit unions, policy makers are destroying one of our communities’ greatest assets and stifling economic growth.
Entrepreneurs, small businesses, and the community-based financial institutions that support them are the foundation of the shared economic and social ambitions we call the American Dream. But recent policies–and their costs–are rapidly eroding this dream. It isn’t just affecting credit unions, either. Consider that it costs small businesses with 20 or fewer employees $2,830 more on a per employee basis than firms with 500 or more employees to comply with today’s business regulations.
To preserve the unique role that credit unions play in supporting the individuals and small businesses in their communities, policy makers must be made aware of the unintended consequences of their regulations and the harm they are inflicting on the national economy. We must take our cause to America’s leaders, speaking in a single voice that Washington cannot ignore. To this end, I have started a movement and petition to build awareness and strengthen support for our Main Street institutions at SavingTheAmericanDream.org. I ask everyone to join the movement and sign the petition, so we can show Congress and the president we are aware of the legislative threats to our Main Street businesses and community financial institutions and will work to prevent further economic derailment.
In the meantime, credit unions must do more to help themselves and reduce costs in other areas to offset the costs of aggressive regulation. One way to reduce costs is by collaborating with other credit unions in areas that don’t differentiate you. Collaboration is a proven strategy for creating efficiencies through shared resources and increased purchasing power. What’s more, it gives community-based financial intuitions the advantages of scale and flexibility that larger banks enjoy. By collaborating in areas that are non-differentiating, credit unions can redirect resources to areas where they are unique, including supporting the credit needs of their communities with quality member service.
Another way to become more effective at serving members while driving down operational costs is by upgrading technology. Newer technology is essential to meet the needs of consumers and small businesses who expect more varied services and delivery channels. Technology has become ubiquitous for most people today, yet many in the credit union industry are trying to meet digital-age needs using technology platforms that were developed 30 or 40 years ago. These systems are not only ill-equipped to deliver the services members demand, but are costly and difficult to maintain.
Taking these steps will allow credit unions to remain focused on serving their members through the undeniable traits credit unions are known for: service, trust and community affinity. A less punitive regulatory environment, a greater commitment to collaboration, and the technology to support more powerful member relationships are what our industry needs to overcome regulatory compliance burdens and continue fulfilling our role as trusted financial intermediaries to Main Street America.