Consolidation among corporate credit unions is the first piece of the puzzle

While much of the credit union community is buzzing about how many corporates will exist in five years, very few people seem to be focusing on the more important question of what happens to corporate credit unions after the dust settles. Many of the corporates are positioning themselves to be survivors and in reality more are positioning than will probably be in existence when the consolidation movement ends. But, how many of those who are jockeying for position are planning for a new corporate landscape? There are many new issues that will challenge corporate credit unions in the future. A more regionalized corporate structure will open corporates to much greater competition from noncorporates. Corporate credit unions are relatively new to the competitive arena. Until a few years ago few corporates faced competition of any significance at all. The “survivor” corporates will be in direct competition with organizations that thrive on competition and seem to have an endless budget to support their competitive efforts. While corporates may raise concerns about the practice of predatory pricing or “buying the business”, we still haven’t faced the masters of the competitive world. While the regionalization increases the size of corporates it also decreases the number of corporates. Fewer corporates could mean a weaker overall corporate network. At the same time, the consolidation of the natural credit unions means fewer, but larger members also. While the increased demand created by larger credit unions is one strong justification for consolidation among corporates, it also makes more members the target of money center banks and particularly the Federal Home Loan Bank System. The Federal Home Loan Banks have been thriving and competing on a regional basis since their conception. Due to the composition of their membership; banks, thrifts and credit unions; they have the luxury of only pursuing the credit unions that offer the greatest potential for revenue for their bottom line. Corporates haven’t been quick to respond to the occasional defection to the FHLBs because the members that make that decision are usually looking for the ability to borrow term dollars to fund their lending operations and because the majority of credit unions are still investing heavily in their corporate of choice. Corporate credit unions although originally founded as a liquidity center, have been mainly depository institutions and providers of correspondent services to credit unions. The focus of credit union needs may very well change in the future. It is likely that the loan-to-share ratio for credit unions will rise well into the 80% to 90% range in the future. As this measurement rises the invested funds will decrease significantly. At the same time, the competition for those investments will increase as brokers, money center banks and other natural person credit unions all try to get a piece of the shrinking pie. As invested funds decline, the focus of credit unions will turn from higher paying investments to lower cost sources of funds. This is the point that the impact of the fragmentation of the corporate network will become painfully obvious. In addition to the implied government guarantee, the ability of the FHLBs to issue cheap debt into the markets is based upon their jointly issuing their debt on a consolidated basis. In other words, the FHLBanks are collectively responsible for the repayment of their debt. This ensures that the financial strength of one bank doesn’t necessarily impact the issuing rate of the debt. As the demand for borrowings among credit unions increases the corporates’ ability to fulfill that need will determine the longevity of the corporate credit unions. We already know that the FHLBs are willing to step into the role of lender to large credit unions. We also know a key factor in their ability to act as a low-cost lender is tied to their ability to jointly issue debt into the markets. There is no similar mechanism to jointly issue debt into the markets in the corporate credit union community. Regardless of the final number of corporate credit unions in five years, it is a sure bet that several corporates jointly issuing debt into the markets can due so much cheaper than any one on an individual basis. While corporates are scrambling to position themselves as survivors in the network they should also probably be looking harder to build partnerships with others to ensure the longevity of the corporate network as a whole. The corporate community is faced with a very difficult task. Continued consolidation of the corporates will provide economies of scale that benefit credit unions through lower prices and higher rates. At the same time, the competition that has been created in the wake of consolidation is dividing a potential financial powerhouse. Corporates not only need to plan for fewer surviving members of the network, but also for how those survivors can form a strong alliance that will ultimately benefit credit unions and ensure the existence of corporates into the future.