For every action there is a reaction, and it's no different for credit unions and the Corporate System. This is the time for credit unions to react.
The Corporate System has been the subject of much discussion and debate over the past months, so there's no need to spend more time asking why or placing blame. The fact is, if corporates are to be around in the future, planning for it must start now.
In The Beginning
First, a little history. The Corporate System wasn't founded to serve corporate credit unions; it was intended to work only for natural-person credit unions. I can't think of a single service offered by corporates that was not first requested by credit unions.
As those who have been around for a while (a long while) will remember, virtually every credit union in the country was forced to use a bank, savings & loan, or both, before corporates existed. Credit unions were treated like any other business-paying as much for services as retail customers because, frankly, banks certainly did not treat them as other financial institutions. The credit union league presidents saw the need for our industry's own central "banks" to serve credit unions exclusively and created what is now known as the Corporate System. With the backing of the leagues, corporates flourished and, like college graduates, they soon "flew the family nest," able to stand on their own. Now, the Corporate System has been providing needed services to credit unions for nearly four decades.
Where We Are Now
But what about today? What services do credit unions receive from their corporates that they can't find elsewhere? The answer is "none." All 8,000 or so credit unions in this country that are members of corporates can go elsewhere for services. And, indeed, they might have no choice, if a couple of the largest and most powerful credit unions in this country have their way.
But before that happens, let's consider some of the services that credit unions now rely on corporates to provide: daily liquidity, lines of credit, guaranteed lines of credit, Central Liquidity Facility; item processing and imaging, Fedwire service, cash ordering; financial analysis, ALM training, and settlement.
Corporates have a longstanding reputation for providing these services at the lowest costs, and the Corporate System's settlement program has long been the most efficient, cost-effective service available. It would be the most difficult to duplicate.
At the Crossroads
The question a credit union needs to ask is, "Do we need those types of services to serve members? If so, where can we find them, and how much can we pay for them? Is it better to go it alone, or should we join with other credit unions to receive the best price?" The Canadian credit unions say, "We are stronger together than apart."
If I don't miss my guess, it will be a cold day in "you know where" before credit unions recapitalize their corporates. So, if credit unions believe they can just pick the services they want at the old prices, they will need to rethink the business case. Most of the larger corporates subsidize many of the services offered with income earned on their capital (reserves, PIC and member capital). But that's gone now, as we are painfully aware.
Some say we don't need so many corporates. While there may be a good business case for having fewer corporates, there are more criteria to consider. Smaller and midsize corporates have provided what their members want very well. Some say fewer corporates is what NCUA wants. But no one from NCUA has ever said that publicly, and having large (or really large) corporates is a bigger threat to the insurance fund, as we have seen. Should corporates (and U. S. Central) become credit union-owned, taxable CUSOs? That might work.
I doubt anyone knows the answer to these questions just yet. But credit unions need to get together (including NCUA representatives) and decide what they want, and what price they can afford. A good place to start is to research some of the articles by one of the best brains in the industry, Chip Filson. Then discuss the issue, prepared with full knowledge.
The corporates will help find solutions, even if it will change how they do things. But the fact is, it's time to reinvent the Corporate System or remove it.
Richard M. Johnson is the former president/CEO of WesCorp.