Much of CFCFE’s work is focused on what credit unions can do to improve or enhance their organisations to better serve members. A new paper, authored by Ismail Erturk, Senior Lecturer at the Alliance Manchester Business School, takes a more ‘outside-in’ perspective, considering how policy and regulation may constrain the credit union business model and how this could be changed. Ismail will be one of the panellists discussing regulation in the afternoon of our conference on 24th September.
The paper will be published in the coming weeks, and here Ismail provides a summary. Definitely food for thought.
Monetary policy and regulatory threats to credit union business model and proposals to strategically respond to such threats to continue delivering socially useful finance
“The monetary system is the cornerstone of an economy. Not an outer facade, but its very foundation. The system hinges on trust. It cannot survive without it, just as we cannot survive without the oxygen we breathe. Building trust to ensure the system functions well is a daunting challenge. It requires sound and robust institutions.” (Borio 2018, p. 16)
The quote above from the Head of the Monetary and Economic Department of the Bank for International Settlement, the institution that is responsible for the Basel capital adequacy framework and influences the global initiatives for financial stability, would make one think that credit unions, with their trust-led contribution to the fabric of the financial system, would be supported by the regulatory authorities and would be used as a model in appropriate contexts. However, the evolution of monetary policy and the regulatory choices by banking authorities since the 2007 Great Financial Crisis have inadvertently created a financial system that sucks the air out of the credit union business models.
I identify three major threats to the credit unions’ socially useful business model:
- Central bank quantitative easing policies aiming zero-bound/negative interest rates that put net-interest margin business models at existential risk.
- Computationally complex Basel capital adequacy framework that ignores a) the member-driven simpler credit and liquidity risk profiles of credit unions and b) the lack of agency problems of shareholder value-driven banks.
- Favouritism by the regulators for FinTech, financial technology companies, which introduce technological innovation to finance and banking, in its better examples, but where apparently sustainable socially useful business models are, in fact, suspect in many cases like Greensill in the U.K. and Wirecard in Germany.
My report will provide evidence and argument why these three forces create a toxic macro-economic and regulatory environment for credit unions. After this analysis I will propose how credit unions can respond to these threats. My proposals are as follows:
- Central bank imposed historically low interest rates are here to stay for medium- to long-term. Therefore credit unions need to counteract the margin losses by volume solutions. Such volume solutions can be socially useful community lending to address intergenerational wealth balances, lack of affordable housing, need to replace more expensive debt, extend maturity of other consumer debt, etc.
- A robust engagement with the regulators regarding the unintentional consequences of Basel capital adequacy accord – a one-size-fits-all model for credit unions that are not shareholder value-driven and have credit and liquidity risks that are of a different economic order than the ones at complex banking conglomerates.
- Consider creation of a socially useful collectively built credit union mobile phone delivery infrastructure that complements the existing branch infrastructure. Linking members’ digital payments to their credit union savings and deposit accounts increasingly looks a necessity. Credit unions should have access to similar sandbox support from the regulators in developing such mobile payment services as FinTech companies and other incumbent financial institutions.