MADISON, Wis. — As the United States faces a banking crisis, modern day credit unions are hoping they will gain market share like their predecessors did in the 1930s. However, the U.S. and world economies have changed quite a bit in nearly 80 years. Are there more recent examples of banking crisis that indicate credit unions will, in fact, gain market share?

Yes, said World Council of Credit Unions Chief Operating Officer Brian Branch. In fact, financial crises like the current U.S. banking crisis are actually quite common around the world.

“In fact, when we get more involved, it's often a more traumatic situation, like a civil war or huge natural disaster that would wipe out banking and financial services,” Branch said. “But, even in these environments, you see credit unions continue to operate, and reignite their communities.”

Perhaps the most appropriate comparison to the current U.S. situation is the banking crisis that affected the South American country of Ecuador in 1998, when its currency was severely devalued, and the government was forced to bail out several banks. According to Luis Jara, a WOCCU employee who heads various programs in South America, Ecuador fell victim to a practice that has crippled banking systems in other South American countries: bank financing of political campaigns.

“The high liability rates to which they were capturing deposits gave us the idea that something serious was about to come,” Jara said, recalling the events that led up to the crisis in his home country.

Throughout the crisis, however, Ecuadorian credit unions didn't find it difficult to stay in business.

“We practically never closed–only when the government considered that no financial institution should serve until they made their adjustments to the new monetary policies,” Jara said, adding that liquidity was an issue at first as many financial resources were tied up in failed banks.

Luckily, Ecuadorian credit unions had recently improved capital, lending standards and risk management, working with WOCCU to increase standards.

“Thanks to the technical assistance that had been offered by the project [WOCCU Ecuador], a large part of the cooperative sector did not have funds in banks that were declared bankrupt. Helping in this manner to give the image of solidity of the cooperative sector, not even one single credit union was declared bankrupt,” Jara said.

“No credit union limited the withdrawal of member savings, nor loans, unless they considered a measure analysis. At no moment were the credit operations closed due to the crisis; on the contrary, credit unions tried to help a larger number of members that had been left without liquidity by the bank crisis.”

Branch agreed, saying in contrast, banks stopped lending to the average Ecuadorian, sending consumers to credit unions in droves. The cooperative system grew in both membership and deposits.

Credit unions first had to overcome the public's initial distrust for all financial institutions, Jara said.

“However, because credit unions did not close their doors, had sufficient liquidity to attend as much to withdrawals as to credits, and adequately managed with anticipation the financial risk indicators, it helped to rebuild the confidence of the members,” Jara said.

Does Jara have any advice for American credit unions, trying to not only retain members, but increase market share?

His words of wisdom centered on the need for basic safety and soundness, a cornerstone credit union principle.

“While the banks passed through sustained insolvency, credit unions held a very high institutional capital indicator, in some cases they exceeded 10% in relation to total assets, which helped them to stay afloat until financial problems passed,” Jara said.

Looking back, Branch said what allowed Ecuadorian credit unions to thrive in the late 1990s was the “not very exiting stuff like good management and good loans,” which positioned them to grow during the crisis.

However, these days, Ecuadorian credit unions are back to competing full-tilt once more against banks with deep technology and advertising pockets.

“Frankly, the public's memory is very short, and after the crisis, it was another rush to what's shiny and new,” Branch said. “Just like here in the U.S., Ecuadorian credit unions always have to stay on their feet and respond to next market challenge.”

–handerson@cutimes.com

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Member Memories Short After Ecuadorian CUs Thrived in Financial Crisis

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