The following strategy-focused overview candidly dissects the challenges and risks that are dangerously snapping crocodile-like at the heels of credit union leaders. The mere fact that there is so much change going on and so much change that could go on in the 2012 to 2013 timeframe makes credit union’s reluctant to take major strategic steps when significant energy and resources might be demanded to manage through these unprecedented challenges. Although potentially unsettling for those who like easy answers, this overview’s’ fundamental premise is that today’s credit union leaders must thoroughly understand what they are up against and mitigate it. Credit unions aren’t paranoid if malignant forces are truly out to get them! Use this overview as a discussion-starter at the next Management Team or Board of Directors meeting.
Strategic Macro-Trends Affecting 2012:
- Today’s political, legislative, and regulatory risks far exceed the traditional operating risks – credit, interest rate, liquidity, transaction, compliance, strategic, and reputation. The crushing regulatory burden exacerbated by compliance’s escalating cumulative complexity now drags on the credit union business model and threatens its future viability.
- The polarized Congress and the gridlocked legislative environment that results cause strategic uncertainty in financial services regulation, mortgage finance, and the economic recovery. The November 6, 2012 elections could lead to a massive macro-directional overhaul of the federalgovernment. That added ideologicaluncertainty makes scenario planning and financial modeling difficult at best – perhaps impossible.
- Many credit union officials claim that the National Credit Union Administration (NCUA) Board has been relentless in imposing its interventionist agenda on credit union decision-makers. On a regular basis the NCUA Board demonstrates through its policy directives, supervisory edicts, rulemaking, and enforcement actions that its priorities too often stray from an emphasis on safety and soundness toward micro-management and counter-productive social engineering. However, the biggest burning question – How much is the corporate credit union crisis resolution going to ultimately cost? – remains unanswered.
- In addition to its own pre-disposition to re-regulate credit unions, the NCUA is mandated by the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 and the Consumer Financial Protection Bureau’s(CFPB) statutory mission to examine for and enforce additional complex and costly requirements on credit unions. The NCUA is destined to become a branch office of the marketplace-controlling CFPB enforcing a “level playing field” of fewer consumer choices and limited credit availability.
- The global economic situation has not been this troubled in decades. The U.S. Federal Reserve System Board of Governors has promised to keep interest rates at unprecedented lows through 2014. Only slight improvements are expected in overall economic growth and employment over the next several years. Consumers will continue to focus on deleveraging their debt and limiting their spending. The federal debt continues to grow and the political inability to deal with demographically unsustainable entitlement programs embeds more uncertainty into the fiscal dynamic. The wearying margin-less economic situation obstinately refuses to go away.
- Additional strategic hot topics: net worth expectations, capital access, deposit insurance reform, moral hazard, too-big-to-fail, systemic risk, loan portfolio mix risks, charter conversions, prepaid cards, consumer activist groups, financial literacy, credit union service organizations, participation loans, partisan political polarization, and many specific credit union-identified hot topics.
Key 2012 Strategic Takeaways:
1. Fundamentally Different Decade Ahead. The next decade will be fundamentally different – economically, competitively, demographically, culturally, and politically – from the preceding decade. Using the same strategic approach to the financial services marketplace as in the past would be insane. The economy in particular is expected to inch its way along impeding everyone’s business plan. To keep the credit union’s metaphoric head above water, its leaders must fully understand the prevailing undercurrents that radically impact on strategy.
2. External Risks > Internal Risks. External risk factors – especially political risk, regulatory risk, and complexity risk – will have more impact on a credit union’s strategic success than will internal factors. What one does not control will exceed what can be controlled. Get used to it – uncertainty and how well it gets incorporated into strategy is critical to a credit union’s successful operation.
3. Federal Government Not Friend. The Congress, the National Credit Union Administration Board, the Consumer Financial Protection Bureau, and the Federal Reserve Board have their own political agendas and are not a credit union’s friends. Don’t let them fool anyone into thinking otherwise. Instead, expect them to keep making things more difficult. Treat their increasingly costly, complex, and burdensome demands with deference – but validate, verify, and when appropriate challenge their directives.
4. Ultimate Stabilization Costs Unknown. Regardless of whether the NCUA Board’s loss estimates for the corporate credit union legacy assets are realistic or not, the Board sets the Temporary Corporate Credit Union Stabilization Fund(TCCUSF) assessment based upon those estimates and they drive the credit union’s costs. Nobody knows for certain how deep the multi-billion dollar TCCUSF hole really is or how long it will take to pay it off. Plan for the worst, hope for the best.
5. Industry Infrastructure Fractured. As a direct result of the 2008 financial system meltdown, the current credit union industry’s legacy infrastructure – including its in loco parentis regulators, non-risk-rated deposit insurance regime, and even its traditional trade associations – are showing signs of rust and structural weakness. Proactive demolition and reconstruction of these faltering institutions sans dogmatic platitudes, entrenchedoligarchies, and one-size-fits-all approaches could go a long way toward restoring real return on investment for each increasingly diverse and independent credit union.
6. Heavy Mortgage Loan Mix Untenable. In the absence of a serious refocus of lending strategies credit unions are at risk of becoming the next Savings and Loan debacle. Collectively credit union loan portfolios are dangerously loaded with low-return fixed-rate mortgages. Many credit unions also rely heavily on originating and selling to the secondary market that is currently in flux due to the conservatorship of Fannie Mae and Freddie Mac, the glaring absence of any private market investors, and Congressional proposals that could radically reduce the demand for mortgages. It’s an accident waiting to happen that credit unions must anticipate and avoid.
7. Non-Bank Competition Toughest. Big banks, community banks, thrifts, and even other credit unions are not a credit union’s biggest competitors. Big box retailers, insurance companies, payday lenders, and other non-banks are running circles around traditional federally insured financial institutions and it will only get worse because most of the non-banks’ offerings are convenient, uncomplicated, and consumer-friendly. Credit unions, and especially Congress and regulators, should learn from these competitors’ successes rather than try to stamp them out.
8. Boomers & Seniors Rule, X & Y Drool. Aging baby boomers constitute a major portion of credit union memberships and along with many seniors dominate credit union boards of directors. Generations X, Y, and the very young will not be a credit union’s salvation in the near term no matter how hard they try to attract those smaller demographic cohorts. Each credit union needs to find out what their existing baby boomer members want and find a way to profitably give it to them. Neglecting boomers could be fatal to the institution’s bottom line.
9. CU Business Model Threatened. The traditional low-cost, high-service credit union business model seems increasingly at risk from its cumbersome governance structure, limited access to capital, reliance on loan and investment income, legacy modest means mission, innovation-killing hyper-regulation, and inadequate products and services authorities. Credit unions desperately need additional ways to generate income, broaden service offerings, streamline delivery systems, and generate scalable growth. The credit union business model will need to evolve in ways that will make the traditionalists uncomfortable, but the alternative is stagnation. Credit union leaders must proactively advocate this business model evolution since it won’t be simply handed to them.
10. Urgency for Change. Lead, follow, or get out of the way. Credit union elected officials and management executives that are unwilling to be drivers of change should seek early retirement. The future belongs to credit unions that are committed to and intensely involved in change. A change management skill-set and a sense of urgency will be required if a credit union wants to emerge unscathed at theother end of the coming decade’s strategy-altering uncertainty-laden gauntlet.
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