Transcript the presentation

Financial Cooperatives and the
Financial Crisis:
The U.S. Experience
Clifford Rosenthal, President/CEO
National Federation of
Community Development Credit Unions (U.S.)
International Forum on the Social and Solidarity Economy
Montreal, Canada * October 18, 2011
Today’s Talk
1. Introduction: Credit Unions and Community
Development Finance in the United States
2. One, Two, Three Crises!
3. Public Policy: Obama Administration Support
4. Lessons Learned and the Way Forward
Credit Unions in the U.S.
• The largest cooperative movement
in the U.S.
• 7,700 credit unions (CUs)
• 90 million members
• US$900+ billion in assets
CDCUs are the progressive wing of the
U.S. Credit Union Movement
CDCU
Mainstream
CDCUs are part of
Two Movements
Credit
Unions
CDFIs
CDCUs
The CDFI Movement
• Community Development
– Credit unions
– Loan funds
– Venture capital funds
– Banks
– Microenterprise funds
• Different financial tools
• $30 billion in assets under management
• U.S. Treasury CDFI Fund invests in CDFIs (since
1995)
The National Federation of Community
Development Credit Unions
• NGO serving CDCUs since 1974
– 235 member credit unions in 46 states
– 1.6 million members
– US$11 billion in assets
• A leader of the CDFI movement
• What we do:
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Provide capital
Technical Assistance and management support
Regulatory advocacy
Innovative programs to serve low-income people
Everything is connected!
2. ONE, TWO, THREE CRISES!
#1: The Crisis of the “Mainstream”
Banking System
• Massive bailout
• Liquidation and Merger of Large Banks, Mortgage
lenders
• Abusive mortgage practices
• Insolvency of secondary markets for housing loans –
Fannie Mae, Freddie Mac
• Frozen credit markets : Shutdown and reduction of credit
lines for businesses, consumers; Higher credit scores
required
# 2: Crisis of the Economy
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Massive rise in unemployment
Huge wave of housing foreclosures
Drop in home values
Federal Reserve lowers interest rates
– A massive transfer of wealth
– Does little to support employment
#3: Crisis of the
Credit Union System
Cooperative Finance
in the U.S.
• The cooperative pyramid:
– Local credit unions, which own:
– Regional “wholesale” (“corporate”) credit
unions which own:
– National wholesale credit union (U.S. Central)
• Cooperative deposit insurance
– Funded by credit unions
– Government-backed (“full faith and credit”)
Investments flow up…
U.S.
Central
Regional
“Wholesale” CUs
Local CUs
… and into capital markets.
Mortgage-Backed
Securities
U.S.
Central
Regional
“Wholesale” CUs
Local CUs
Investment losses flow down.
Mortgage-Backed
Securities
U.S.
Central
Regional
“Wholesale” CUs
Local CUs
The System Crashes!
• 2009: Top level wholesale credit unions are
bankrupt and are taken over by federal regulator
(National Credit Union Administration).
• Estimated losses: $6 billion? $20 billion?
• Deposit insurance must pay, so… .
• All insured credit unions must pay -- now
through 2021.
• Thousands of credit unions are unprofitable in
2009-10 .
Effect on Credit Unions
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Rising loan delinquency
Rising loan losses
Value of portfolio decreases
Regulator presses hard on credit union
It’s Worst on Credit Unions
that Serve the Poor!
• Low-income consumers hard-hit – loan
defaults, delinquency rise
• Equity constraints; Intensified
regulatory pressure on credit unions
• Increases in liquidations and mergers
“It could have been worse, except for…”
3. OBAMA ADMINISTRATION
SUPPORT
Greatest-Ever Federal Support for
Community Development Finance!
• More appropriations even while other
programs cut.
• New program initiatives: Healthy Foods
Financing!
• $3-billion Bond Program
Silver Linings from the Crisis
4. LESSONS LEARNED.
THE WAY FORWARD.
Resilience!
“That Which Does Not Kill Us
Makes Us Stronger!”
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Most of us have survived.
We loaned when banks wouldn’t.
Increased visibility and credibility.
Becoming a recognized public policy tool.
Worst losses behind us ?
The Revolution Within:
Changing Minds
• Big/Bigger/Biggest/”Too Big to Fail” is not
beautiful!
• Greed is not good!
• “The smartest guys in the room” on Wall
Street are not always right.
• Bank on what you understand!
• Bank where you can see your money work!
Credit Union Growth
• More people join credit unions.
• CDCU movement grows!
– Federation membership increases from 200 to
235 credit unions
– Collective assets increase from $5 billion to
$11 billion
– Collective membership increases from 1.0
million to 1.6 million people.
Credit Union Model for a
New Banking Order
• Not-for-profit
• Strict democratic control and accountability: 1 member, 1
vote.
• Limited executive compensation
• (Uncompensated board of directors drawn from
membership – some countries)
• Focus on consumer products
• Often can provide better rates and access to capital than
banks
• Direct local control over capital
• Regulated and insured
• Scalable
The Case for a
Credit Union Strategy
• 90 million members in U.S.
• Broad recognition (though not enough)
• Despite the current crisis, credit unions
will survive the “stress test”!
– Well capitalized (on average)
– Self-financed
– Demonstrated increased lending in 2008
when banks were freezing credit
Some Large Questions
• How much can we insulate ourselves from the
overall financial system?
• Can we/must we compete with banks to maximize
financial return to our depositors or investors?
• What relationship to government? Can we do
without guarantees and back up of deposits?
Should we?
• How large must we be to survive? How large must
we be to make an impact?
Paths for International Collaboration
• Work together to insure appropriate treatment of
financial cooperatives and CDFIs in the emerging
global regulatory structure!!!
• Exchange best practices and information on serving
the poor, the socially excluded.
– Local models of finance
– Regional and national financial structures
• Common policies on serving immigrants?
International money transmittal?
Cliff Rosenthal, President/CEO
National Federation of
Community Development Credit Unions
39 Broadway, 21st Floor
New York, New York 10006
212.809-1850 / fax: 212-809-3274
www.cdcu.coop
[email protected]