Last week 5,000 credit union leaders gathered in Washington DC for CUNA’s annual Government Affairs Conference (GAC). As its name implies, the GAC is heavy on congressional interaction and industry advocacy. Given the heightening battle of legislative tug of war between banks and credit unions, that’s a reasonable use of time. But as the largest credit union event of the year, the GAC was also an opportunity for thought leadership.
CUNA CEO Jim Nussle – a former Iowa Congressman and onetime director of George W. Bush’s Office of Management and Budget – looked to create common cause with small banks. He pointed to statistics showing that the nation’s 100 largest banks now hold 75% market share in asset terms – up from 41% in 1992. Credit unions have held their own during this period, actually growing share slightly (from 5.6% to 7.1%). Smaller banks have borne the brunt of consolidation, their share falling by two-thirds.
One size fits all regulation isn’t the answer
A recurring message- voiced by Nussle, by Congressional guest speakers, and even by CFPB head Richard Cordray – was that credit unions (and presumably community banks as well) didn’t cause the 2008 financial crisis. But mutual admiration has its limits.
Nussle railed against “one size fits all regulation that robs credit unions of their difference,” and CUNA unveiled new research documenting $7.2 billion of regulatory burden on credit unions, a 60% increase in the past 5 years. CUNA calculates regulatory compliance as costing each credit union member $71 per year- one-sixth of operating expenses, and an amount largely equal to operating income- which in the non-profit credit union model is returned to members, or in recent years set aside to meet increased capital requirements.
Not surprisingly, these costs fall disproportionately on smaller institutions. Small credit unions incur costs equal to 1.16% of assets to meet compliance needs. For $1 billion+ credit unions that ratio falls to 0.44%, although their overall expenditure is greater.
Regulations and consolidation affecting small FIs disproportionately
An earlier post touched on the role the fixed cost of regulatory compliance plays in the decline in the number of small banks. CUNA’s analysis certainly supports such a conclusion- as with banks, it’s the smaller institutions that are vanishing most rapidly.
The accompanying graph illustrates this point- there continues to be more US credit unions than banks, although since 2000 the rate of credit union decline has been more rapid. It’s remarkable to recall that since 1984, the combined number of banks and credit unions has fallen from 32,775 to 11, 522- still a count that dwarfs any other country, however.
As is often the case, those headline figures mask a more nuanced story. Three-quarters of credit unions have assets of under $100 million (half are under $20 million!) while only 29% of banks fall below the $100 million threshold. And it’s the small-FI that’s enduring the greatest shakeout- whether or not this is a direct result of regulatory burden is unclear, but it certainly plays a role.
Cyberattacks are an eventuality, be prepared
In another type of compliance, former Nightline anchor Ted Koppel delivered a chilling message. His recent book Lights Out explores the “when, not if” dynamics of a cyberattack on the nation’s power grid, which according to Koppel is likely to leave roughly a third of the US without electricity for weeks if not months. Koppel’s investigation indicates that deregulation created 3,200 separate power companies, linked together by the internet- which he says “was never designed to be defended, it was designed for collaboration.” This message is consistent with Bryon Wien’s prediction (which thankfully has yet to come true) that a major US bank will find itself shut down for multiple days by cybercriminals.
Koppel’s takeaway isn’t so much a call to prevent such an assault, but rather a sense of amazement that no concrete plan exists to cope with such an eventuality. These scenarios certainly aren’t fun to think about, but they reinforce the need for robust disaster planning. If/when such events occur, the procedural differences between banks and credit unions will seem truly irrelevant.
Kudos for Social Responsibility
But let’s end on a positive note, shall we? A longtime credit union mantra has been “people helping people,” and toward that end CUNA recognized several leading lights with the Dora Maxwell Award for social responsibility.
Deluxe clients won the top two spots in the Large CU ($1 billion+) category. Georgia United CU of Atlanta adopted a local elementary school and gave it a full interior/exterior makeover. Runner-up CommunityAmerica CU of Lenexa, KS also enjoyed the distinction of earning an Adult Financial Education award. Two more Deluxe clients took home awards in their respective size categories: Merck Sharpe & Dohme FCU of Chalfant, PA, and Telco Community CU of Asheville, NC. Congratulations and thanks to all for their important work in our communities.