The cost of the collapse of the two largest corporate credit unions and the billion-dollar contingent liability looming at dozens of natural person credit unions are of paramount concern to credit union managers throughout the country. Thousands of credit unions are facing ongoing hits to capital to pay the bill. Since capital supports growth and member services, the far-reaching consequences are manifold.
In the short term, if competitive factors allow and in an effort to restore capital, some credit unions will seek to boost revenues and lower costs. Will members and employees pay the price? Will the hard earned consumer franchise dwindle?
For credit unions, more fees, higher loan rates, lower deposit rates, fewer services and employee cuts are among the only options other than merger. So, thousands are likely to merge in just a few short years.
What about the promise of industry saving fixes of business lending and secondary capital being promoted by the industry's lobbyists?
Won't higher business lending authority just entice marginally capitalized and inexperienced players to stretch for yield and thus further elevate risk to the share insurance fund-thus setting up another cycle of NCUSIF capital calls?
What about the promise of secondary capital? Third-party capital takes the onus of growth off the backs of members and employees and helps save the institution's franchise. As large institutions retrench and community institutions become more important to the banking equation, it may even help fund expansion opportunities. However, credit union secondary capital is untested and in the form proposed fraught with obstacles, more management liability and a regulator with no implementation experience.
In 1998 Congress, recognized that some credit unions would face the need to have access to capital and higher business lending authority. Therefore, it provided a simple path to converting to a bank. That path is available today.
In the months ahead, in order to maintain independence and relevance, dozens of credit unions will be converting. Even credit union managers who in the past would never for a minute entertain the thought of conversion, when faced with preserving member capital, saving a hard earned franchise and the clear directive from the board to explore the bank charter, will join the converted list.
Credit unions are facing an uncertain future. Therefore, now more than ever, executives need to give fresh consideration to all their strategic options, including conversion from the credit union charter.