BIRMINGHAM, Ala.-While debate persists over whether the new corporate structure affords the credit union community greater investment safety, discussion continues regarding the viability of the new marketplace.
Former NCUA Chairman Dennis Dollar told Credit Union Journal that how a corporate builds its business model to comply with the new guidelines and still meet the fundamental needs of its credit union members will be the determining factor as to whether the corporate survives.
The Dollar Associates principal pointed out the higher capital requirements of the new corporate rules, combined with lower investment earnings, will inevitably lead to less discounted services pricing by the corporates for their members. "Face it; the growth in capital needed to meet the requirements of the new corporate rules can come from only one source, natural-person credit union members.
"But Dollar believes rules governing the corporate system will become more flexible over time. "This will be essential because corporates must be both well-capitalized businesses and valued business partners for their members. For the time being, however, the new corporate rules are a great baseline from which to both build and judge the much different looking corporate network of the future. There is no problem with the new corporate rules that cannot, and frankly will not, be adjusted as the new corporate system evolves, implements its business models, builds its capital foundation, and serves its member credit unions."
Two Sets of Balance Sheets
Stuart Perlitsh, CEO of the $324-million Glendale Area Schools FCU in Glendale, Calif., thinks things need to change now, saying rules need to be in place today to ensure both sides of the corporate's house-investments and item processing-stand on their own.
"The corporate credit unions must create two sets of balance sheets and income statements. Require self-sufficiency at the corporate CU investment house with its own balance sheet and income statement. Require a more labor-intensive back office-share draft processing, federal wires, ACH settlements, etc.-to be self-sufficient with its own balance sheet and income statement. Do not permit one to subsidize the other, which is what helped lead to the recent problems. Make the backoffice pay its own way. These two sets of statements will force management and the corporate directors to make prudent pricing decisions."
Henry Wirz, CEO of the $1.9-billion SAFE CU in North Highlands, Calif., thinks the corporates would be in a better position today had the CU system and NCUA come to an understanding that it was far better to fix the network rather than simply erasing it as an investment alternative and turning it into an item processing and settlement service.
"Now the upshot of this is most large credit unions go to Federal Reserve, leaving the corporates with smaller credit unions, a weak business model, and all of the investment risk transferred to the natural-person credit unions. Over time we will see the mistake.
The Root of the Problem
In looking back, Dollar sees a successful future of the corporate system dependent upon actions of the corporate leaders and natural-person CU execs. "Even though the rules needed some well-reasoned revision after we learned a lot from those corporates with the highest losses, the question really presents itself-was the problem the previous rules themselves or how some corporates were operating their business models within those rules? Again, while certain aspects of the new corporate rules will prove valuable in helping prevent future losses, the emphasis on due diligence performed by corporates and the natural-person credit unions that invest in them will do more to prevent future losses than any other factor-including the new rules.