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Recently a friend of mine gave me a wonderful explanation of a financial intermediary. Most of us could not afford the risk of lending someone the money to buy a car. If the person had problems paying us back we would find it difficult to absorb the loss. That’s where a financial intermediary such as a bank or a credit union plays a valuable role in our economy. A credit union collects the deposits of its members and then prudently lends and invests those funds. If a loan goes bad, the credit union can typically absorb the loss through the earnings of operations. The role of corporate credit unions was that of financial intermediary for member credit unions. They were able to invest in ways that their member credit unions may not have had the ability or scale to invest. If the proposed corporate regulations go through in their current form, corporate credit unions will lose much of their ability to be financial intermediaries for natural person credit unions. It is questionable whether restrictions such as limiting the average lives of a corporate’s investment portfolio to two years will allow the corporates to generate enough income to fund their operations never mind offer a competitive return on investments to member credit unions.

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Peter Westerman

Credit Union Times

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