Few issues generate stronger emotions or wider ranges ofopinions than credit union conversions. Skepticism about themotivations and misunderstandings about the processes forconversions are pervasive. Understanding is increasing, however,that conversions raise many salient issues: How should and docredit unions differ from banks? Who does and should benefit fromconversions? What does it really mean for members to own theircredit unions?

As conversions continue, what will also become increasinglyunderstood is that the current conversion process fails members andthat reforms can readily improve understanding, improve decisionsabout whether to convert, and improve fairness to credit unionmembers.

In a newly released Filene Research Institute research report,Credit Union Conversions to Banks: Facts, Incentives, Issues andReforms, I develop a framework that clarifies what the variouscosts and benefits would likely be to members, managers, andoutsiders. I also propose readily available reforms that wouldprovide more rewards to the members who contributed more to thevalue of their converting credit unions. In that regard, myproposals make credit union member-ownership really worthsomething. Fair Shares

Credit unions may offer lower loan rates and higher savingsrates than their competitors. On the other hand, conversion to astock-owned institution offers members the opportunity to ownshares that can be turned into cash. One way to judge whether toconvert is to compare the value of members' future credit unionbenefits to the value of their shares in a convertedinstitution.

The better a credit union's product offerings, rates,operational productivity and member services, the less compellingis the case for its conversion. By contrast, relative to thebenefits that it offers, the more net worth that a credit unionhas, the more attractive and justifiable to members will be itsconversion. For example, a credit union that charges its borrowersand pays its savers interest rates that are about the same as thoseof its stock-owned competitors and that has a high capital ratiomay benefit its members more by converting. But, this relies onmembers' getting their fair shares. So far, regulations effectivelyprevent members from getting their fair shares. That can, andshould be, fixed.

Current mutual-to-stock conversion regulations for thrifts andbanks provide members with the right to buy shares of stock in theconverted institution. When members have to pay up if they want toown any shares in the converting institution, which they arepresumed to already own, we should be concerned that something isseriously amiss. And it is.

The number of shares each member is entitled to purchase islinked to the member's pro rata share of deposits as of someeligibility date. History demonstrates that few members actuallypurchase shares. Typically fewer than one out of 10 members ofconverting mutual thrifts have purchased shares. Purchasing noshares, they get none.

Shares that members forego are then offered toothers-management, board members, and outside investors. All ofthose who do purchase shares then have ownership of both thepurchase amounts that they contributed-plus the retained earningsand the often-considerable ongoing-enterprise value of theconverting institution. The ownership surrendered by members whodidn't fully exercise their right to purchase shares then accruesto everyone who did. The typical one-day gain for purchasers hasbeen about 19 percent.

As a result, the current conversion rules distort the incentivesof almost everyone to convert. The rules make it difficult for mostordinary members to accurately see how they might benefit fromconverting. At the same time, the rules can make it lucrative formanagement, board members and outside investors to convert.Rewarding Total Contributions

Members should not have to purchase what is ostensibly theirs.In my report, I propose that members be given, at no charge, theshares of their converting credit union.

I also propose how to distribute the most shares to the memberswho contributed the most to the value of converting credit unions.Current conversion regulations are inspired by court rulings, somedating as far back as the late 1800s. Even then, courts noted thatthe simple deposit-based, eligibility-date method was not "just andequitable," but, rather, was "a rule of convenience and necessity"and that it invited "eleventh-hour people to come in asdepositors." Record keeping has advanced since the late 1800s, andso should regulation. I propose that shares be distributed tomembers based on their long-term contributions to the credit union.Distributing shares instead of selling them would reduce-if noteliminate-the opportunity for insiders and for outside investors toexpropriate the ownership shares of ordinary members. Using averagesavings over the prior 5 or 10 years-or since computerized recordsare available-to determine share allotments would dramaticallyreduce incentives for late depositors. To allow for theconsiderable contributions of borrowers to the value of convertingcredit unions, share allotments could also weigh past loan, as wellas savings, balances. I also propose distributing only stock, andnot cash, and somewhat restricting the right to sell one's sharesduring a short transitional period. Since members had not been ableto access that capital for decades, waiting a few more months doesnot seem a particularly undue restriction.

My proposal would not require new legislation from Congress orchanges in regulation from the NCUA. Current mutual-to-stockconversion rules apply to mutual thrifts, but do not apply, forinstance, to credit union-to-commercial bank conversions. As far asI can tell, there is no U.S. law or NCUA regulation that precludesa credit union from using my proposal to convert directly to astock-owned, commercial bank.

These reforms appeal to our judgments about economic efficiencyand our sense of fairness. Reform will make for a more vibrantindustry. Reform will offer a fair and sensible exit route forcurrently well-capitalized, but ultimately uncompetitive, creditunions. It will also discourage exit by credit unions that havewell-served members and thus well-capitalized and profitablefutures. Together, these reforms will better sort out which creditunions convert and better sort out the rewards to the members whocontributed to the value of their credit unions.