Should We Care About Small Credit Unions

September 17, 2014 at 9:00 am 1 comment

Yesterday, the Senate Banking Committee held a hearing ostensibly dedicated to examining the burdens faced by small financial institutions, including credit unions, and what can be done to help them.  I say ostensibly because any discussion of helping small credit unions inevitably and understandably morphs in to a discussion of the role of regulations in general and the need for mandate relief for all credit unions.  For instance, I know Risk-Based Capital Reform is a major issue, but it simply isn’t that important to a $20 million, single SEG credit union.  Still, it featured prominently in yesterday’s testimony.

The reality is that while proclaiming support for small credit unions, the small family farm and the independently owned bookstore around the corner has an emotional appeal, the real question isn’t so much what we can do to save small financial institutions but why we should bother making the effort in the first place. Once we answer that question, then there are actually practical steps we can take to protect viable small credit unions from extinction.

First, let’s define our terms.  Up until about a year ago, a credit union was classified as complex by NCUA if it had $10 million or more in assets.  To it’s credit, NCUA has now raised its threshold to $50 million with the result that a majority of credit unions are now considered small, at least by one regulatory measure.  NCUA’s action shows how difficult it is to define a small credit union.   Nevertheless, we all know what it is when we see one.  To their protectors, small credit unions are the institutions that remain truest to the credit union ideals.  By not growing, they literally do know most of their members and this personal relationship infuses them with a cooperative spirit that you won’t find, the argument goes, as institutions get larger.

While there is some truth to this critique, the reality is that credit unions can remain true to the movement’s ideals while growing to meet member needs.  Economy of scale enables lenders to provide cheaper products and larger credit unions have, in the aggregate, demonstrated a greater willingness to work with members during the Great Recession than have their banking counterparts.

Critics of smaller institutions, or at least those that are indifferent to their fate, point out that as all industries mature, they consolidate.  From a purely economic standpoint it makes perfect sense to have fewer credit unions while the industry as a whole serves more members than ever before; but this hands-off approach to credit union development also misses a crucial point.  It is one thing for institutions to merge because there aren’t enough members, it is quite another for institutions to merge because no one has been trained to take over as CEO.  Similarly, today’s small credit union is tomorrow’s large one.  According to NCUA statistics, 538 credit unions surpassed $50 million in assets over the last decade.

The best way to help smaller credit unions is to start making a distinction between those that are growing, those that are small but can continue to prosper, and those that are doing nothing more than living off past capital accumulation.  For the first two categories, we should work to establish networks of individuals who are intrigued by the opportunity to run a credit union irrespective of its asset size.  On a practical level, this means turning over the reigns to younger professionals who can make up with enthusiasm and ambition what they lack in expertise.  It also means championing greater charter flexibility so there is a middle ground between maintaining a SEG based existence and converting to a community charter.

Finally, smaller credit unions have to do more to pool their resources. A good example of this approach is the sharing of compliance resources among several credit unions. For me, the bottom line is this: whether a credit union is big or small, it shouldn’t be forced out of business where there is still a demonstrable need for its services.

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1 Comment Add your own

  • 1. GDStockdale  |  September 18, 2014 at 12:52 pm

    Don’t you just love it when someone comes in with a “one size fits all” approach? Turn over the reigns (throw out seasoned and hard working current employees who only sin is to still be in the industry after the debacle they didn’t create?) to those with enthusiasm (Please go talk to Grace Mayo, she was enthusiasm personified … and where did that leave her? Right in the base of you next generalization) lack expertise. So, once again, you are proposing we learn nothing from the past… Enthusiasm trump expertise? Sell the sizzle and not the steak! Who will pick up after the next debacle? Call in the old, weary, dried up, dried out folks you just threw out with yesterday’s Big Mac. The simple truth is that the marketplace is working. Valid and relevant organizations stay around the dead wood is merged – regardless of size.


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Authored By:

Henry Meier, Esq., General Counsel, New York Credit Union Association.

The views Henry expresses are Henry’s alone and do not necessarily reflect the views of the Association.

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