Preserving Diversity in the Credit Union System

A special message from Mary Martha Fortney, President and CEO
April 2012

Given the volatile nature of the recent economic crisis, it was inevitable that pressure would build on regulators to respond to the crisis with additional regulations. Certainly some of these new regulations were promulgated in response to poor practices that exposed gaps in regulation.  If credit unions are feeling overwhelmed by new regulations and compliance obligations, it's completely understandable.

As regulators continue to provide for a safe and sound operating environment for credit unions, I encourage the system to not lose sight of what has worked for nearly 100 years – the credit union dual chartering system.

While the current system was not deliberately engineered, it provides important choice, competition and innovation for regulators and credit unions. NASCUS has long believed that the dual chartering system is a source of strength for the credit union system.

Dual chartering gives credit unions the option to choose the charter that best fits the unique needs of its members. A strong state and federal charter benefits the entire system, and is critical to safety and soundness of today’s credit unions. Dual chartering provides important diversity, competition and innovation in the credit union regulatory structure. Without the dual chartering system, there would be no laboratory for the charter enhancements that have made credit unions what they are today.

Dual chartering benefits regulators, too. State and federal regulators are in dialogue throughout the year addressing trends and revisiting national examination policies. They push each other to improve oversight and to continue achieving the highest standards in safety, soundness and public confidence for credit unions. The inherent tension between the state and federal regulators also highlights that different approaches might work for a specific concern. That benefits all. State regulators and the National Credit Union Administration (NCUA) meet regularly and stay in constant communication to protect the safety and soundness of credit unions. That is dual chartering at work.

As we move forward in a new economic and operating environment, I caution the system against a "one-size-fits-all" and homogenization of the credit union system. There are those, both inside and outside the credit union system, who would seek to do just that to state and federal credit unions. There are those who would seek to blend all the regulations, all of the business approaches and all the regulatory philosophies into one.  There is danger in the thinking that by eliminating the differences between state and federal charters, the result would be a leveled playing field and less exposure to risk. NASCUS disagrees with this premise; blurring the distinctions between state and federal charters does not level the playing field; rather, it drains innovation.

Recently, NASCUS wrote to NCUA regarding its proposed credit union service organization (CUSO) and loan participation proposals. Historically, state-chartered federally insured credit unions (FISCUs) have looked to state law and regulation to govern their loan participation and CUSO activities. These proposals leave little flexibility for states to authorize distinct powers for their credit unions — a disturbing trend and concern to NASCUS with respect to the long-term viability of the dual chartering system. The possible result is a continued standardization of the natural person credit union system; a trend that is more than unfortunate, it is unnecessary and detrimental to the long-term health of both the state and federal systems.

A healthy dual chartering system encourages innovation and enhances supervision. Many financial products that are commonplace today arose from innovations in state-chartered financial institutions. NCUA's sweeping share insurance rules that preempt state authority diminishes the opportunity for varying state laws to provide flexibility for innovation of new products and services. In addition, a uniform approach to credit union regulation impedes supervision. As the U.S. Treasury Department so aptly observed in a 1991 publication, Modernizing the Financial System, diversity of supervision "increases the chances that innovative approaches to public policy problems will emerge...A sole regulator, not subject to challenge from other agencies, might tend to become entrenched, conservative and shortsighted."

Of course, the system is not perfect. Enhancements can and should be made. State and federal regulators should work diligently to promote efficiencies in examination and supervision to reduce any burdensome regulatory footprint on credit unions. But, weakening the dual chartering system is not part of a logical solution to the economic or supervision problems.

NASCUS has long stood for diversity in the credit union system, both from the standpoint of charter choice and from the perspective of regulatory oversight. I want to ensure that we keep the benefits of dual chartering top of mind as we recover from the recession and as credit unions evolve and grow into the future.