“The best way to predict the future is to invent it.” — Alan Kay
What does the future hold for Michigan credit unions and their members? Who will determine what that future looks like?
These are indeed very interesting times for credit unions, their members and, yes, for their regulators as well. Challenges abound, ranging from a struggling economy to increasing competition and regulatory burden. I continue to believe, however, that Michigan credit unions are well positioned to meet these challenges, provided they don’t confuse a successful future with a return to an idealized past.
Consider some changes over just the past 20 years. In 1985, Michigan’s 479 state-chartered credit unions held about $4.5 billion in total assets, an average of $9.4 million per institution. By 2005, the number of state charters had declined to 245, but asset holdings totaled $19.2 billion, or $78.2 million per institution.
During those 20 years, the number of institutions dropped by almost half, but the average size of those credit unions grew more than 800 percent. Will this dramatic consolidation continue and, if so, what might it mean for Michigan credit unions?
First, I believe sound corporate governance practices will become increasingly important. Corporate governance is the relationship between shareholders, directors and management of an entity as defined by corporate charter, bylaws, formal policy and the rule of law. Recent corporate scandals have eroded public confidence, resulting in increased regulatory requirements for publicly traded companies and a greater focus on governance procedures in general.
As member-owned cooperative organizations with volunteer boards of directors, credit unions need a governance system designed to control and distribute power within each credit union. Providing sound governance that recognizes and respects the rights and financial needs of credit union members is the primary responsibility of each board of directors.
I believe each board should develop written corporate values and ethical standards, which should become part of the overall organizational culture. Boards must also take this concept to the next level — regularly evaluating organizational behavior against these values and ethical standards. If credit unions collectively do not ensure sound governance practices exist throughout the industry, outside interests surely will.
Second, I believe credit unions and their regulators must continue to recognize that innovation and efficiency are not options to be considered, but essential elements of a successful future. Regulators do not drive innovation, nor should they inhibit it, if it occurs within the bounds of safety and soundness.
Depository financial institutions, by nature, operate on the currency of public confidence. Clearly, the perspective of regulators and those we regulate may differ, but credit unions and their regulators must recognize and share the common goal of maintaining public confidence, above all else.
Here at OFIR, we regulate a broad variety of financial service providers. Credit unions often seem the most willing, however, to let themselves be defined by others.
Take alternative capital as an example. Credit unions are, to my knowledge, the only depository financial institutions that must depend solely on earnings retention for capital growth. Even the credit union’s own members cannot provide additional capital to bolster regulatory net worth, whether to help through troubled times, support a growth strategy or increase the level of member service provided.
A well known and respected federal government agency studied the issue a couple of years ago, and concluded that there is “no compelling need” for alternative capital in the credit union system — case closed. Where would credit unions be today if they had deferred to the view of a federal government agency in determining whether there was a “compelling need” to offer share drafts in the 1970s?
The point here is not to disparage the reasoned view of regulators — who are, by nature and necessity, risk averse — but to recognize that allowing oneself to be defined by others will not likely lead to a dynamic and successful future.
Finally, we on the regulatory side must always recognize that risk is an inherent element of depository financial institution operations. Clearly, appropriate risk tolerances and risk management practices must be established and enforced; by regulation globally, and by sound policies, procedures, and controls at the institution level.
Attempting to regulate or micromanage too much risk out of credit union operations seems to me a very counterproductive long-term strategy. Credit unions must become more sophisticated risk managers to ensure their long term viability in today’s competitive marketplace. Again: If credit unions collectively do not ensure sound risk management practices exist throughout the industry, others surely will.
I believe the dynamic tension between credit unions and those of us on the regulatory side — and, yes, perhaps even between regulators themselves — imposes a healthy discipline on our overall financial services system. Recognizing our differences while emphasizing our shared goal of maintaining a safe and sound Credit Union System will be a critical element in ensuring a bright and successful future for credit unions.
We at OFIR remain committed to doing just that.