CUs Argue Rule Will Create 'Too Big to Fail' Corps

WICHITA, Kansas-NCUA's proposed new rule for corporate credit unions will indirectly force consolidation among those corporates, according to the majority of comment letters sent to NCUA.

A flurry of comment letters near the end of the comment period have expressed reservations about the future size and services of corporate credit unions, and provisions of the new rule that comment-writers suggested could cripple a number of corporate credit unions.

"Many believe this regulation is designed to force consolidation of the corporate system and the NCUA chair has stated that 'twenty-eight corporates are far too many for a system our size,'" the board of Kansas Corporate Credit Union wrote. "We respectfully disagree and believe that KCCU, and corporates in general, have a strong market share because they're local, have developed personal relationships with their members and, most importantly, respond to local needs. Consolidation seems contrary to the position of other regulators and consumer groups that never want to expose taxpayers to another bailout of the financial industry."

Importance of Being Local

LaRae Kraemer, CEO of K-State FCU in Manhattan, Kan., which is a member of KCCU, echoed those concerns, adding that natural-person CUs would suffer if the corporate system were to be consolidated. He told NCUA that the proposed rule could force CUs to work with other provides "who will neither have credit unions' best interests at heart, nor allow credit unions the ability to fiscally afford their services."

From Portland, Maine, Tricorp FCU Stephen Roy argued that regulatory changes that increased competition and diluted the principles of the cooperative model led directly to the corporate meltdown, and that the global financial crisis merely hastened that day of reckoning.

"The flawed premise for these regulatory changes seemed to be centered on the notion that the system was not efficient enough, that there were too many corporate credit unions and that consolidation of the industry was necessary," Roy stated in his letter.

The new environment spurred some cooperates to try to become the survivors by drastically increasing market share, but that strategy "actually diluted rather than improved efficiencies," Roy suggested, adding with a reference to San Dimas, Calif.-based WesCorp, "Ultimately the environment became toxic...when in the latter part of this 15+ year journey the largest corporate credit union was aspiring to become a direct competitor with US Central, while at the same time having a protected US Central Board seat, the toxic environment and demise should have been evident to everyone."

Even as NCUA seeks to fashion a rule in the wake of conservatorships of US Central and WesCorp, and the severe erosion of member capital at other corporate CUs, the lessons of the now defunct Capital Corporate FCU (CapCorp) have still yet to be learned, according to Dennis DeGroodt, President/CEO of Missouri Corporate CU. CapCorp was seized by NCUA in February of 1995.

Don't Let History Repeat Itself

DeGroodt said that because CapCorp had a national field of membership (although Maryland-based it was open to all NAFCU member CUs), it took on excessive risk to compete in local markets and ultimately failed. DeGroodt stated that the broader financial sector crisis was caused by megabanks, arguing that additional consolidation would not build scale and add stability to the system, but instead lead history to repeat itself.

"We will have created a system of corporate credit unions that are 'too big to fail.' Evidence of a system that is too big to fail is the effort to shield legacy assets at the large corporates," he wrote. "We recommend NCUA craft a rule that gives each corporate credit union a reasonable chance for success. Otherwise only a few 'too big to fail' mega-corporates will survive."