Like all businesses, corporate credit unions have experienced various challenges since our creation. Corporate credit unions have had to change and evolve through every economic downturn to survive and serve our member credit unions. After navigating through so many market changes, what is the next step for corporate credit unions, and what role will we have in the future?
Corporate Credit Unions: Tested from the Beginning
Corporate credit unions have one primary mission: to stand ready to provide liquidity for credit unions that serve everyday consumers. The need for new sources of liquidity for credit unions arose after World War II when credit unions faced the possibility of their loan-to-share ratios reaching 100%, leaving them unable to grant new loans. “Central” credit unions were formed to meet these needs, and by the late 70s, Central credit unions began to convert to corporate credit unions. What goes around, comes around, eh?
Corporate credit unions were continually tested from the beginning, especially during the 1970s, as inflation and interest rates rose. The rest of the 20th century had its ups and downs. The 2008 financial crisis and the housing market crash that led the way then constituted a serious challenge to the corporate credit union system. As you know, through the end of the 20th and early into the 21st century, subprime mortgages became very popular as Fannie Mae made it easier for those with less-than-perfect credit to achieve the dream of homeownership. Although mostly not credit unions, many lenders got reckless with their underwriting, including low-doc and no-doc loans. They didn’t know or care if a mortgage application's employment information was accurate or complete. Appraisals were, let’s say, overly optimistic, and eventually, the house of cards came tumbling down in 2008. The housing bubble burst.
While the major news outlets reported on the big banks and lenders affected by the housing market crash, credit unions were also hurt by the general economy and financial standing of their members going south. That had an impact on the corporate credit unions. Still, some were chasing higher yields to cover rising fixed expenses and battle competition, leading several, including the nation’s central credit union, U.S. Central, to become overleveraged in CMOs.
The effect was so crushing that corporate credit unions quickly began to consolidate on a large scale. Before the housing crisis, there had been 46 corporate credit unions. By 2008, that number had been reduced to 27, and just 11 remain standing today, including LaCorp.
Keys to Survive and Thrive
Few would have predicted that the surviving 11 corporates out of 46 would include some of the nation’s smaller corporates, while most of the largest would not survive. LaCorp credits its ability to weather the storm and thrive in the aftermath with a few key factors:
- Maintaining a safe investment portfolio by eliminating the need to pursue higher-risk investments by avoiding unnecessary expense and duplication
- Quick and effective legal action to recover investment losses related to market fraud
- Flexibility to quickly replace services formerly provided by U.S. Central with a combination of in-house functions and partnering with the nation’s most reputable service providers.
By putting members ahead of Taj Mahal-style buildings, compensation deals and the temptation of speculative investments, LaCorp maintained safe and efficient operations that benefited its member credit unions.
How Corporate Credit Unions Have Evolved
In a word (or two): risk management.
Corporate credit unions continue to serve as a source of liquidity for our member credit unions today. Corporate credit unions like LaCorp have continued serving our member credit unions through every economic cycle by providing liquidity, investment options and various services.
Given the financial industry's hardships over the years, especially from 2007 to 2008, proper risk management in all investments is a necessity. Other services corporate credit unions now provide include funds transfers, electronic bill payments, and automated clearing house (ACH) services. True to our collaborative roots, many of us have partnered to offer various services, from CECL solutions to business lending consulting and more!
Corporate credit unions continue to fulfill their mission to support the credit unions that support their respective communities. As for the future, all corporate credit unions must continue to adapt to meet the needs of our members while remaining ever vigilant about risk. The economic cycle and technological innovation continue, so corporate and natural person credit unions need to look ahead and be as ready as possible for any challenges to come. LaCorp can provide credit unions nationwide investment services, liquidity, funds transfer services and more!
Let’s discuss your credit union’s concerns and identify where LaCorp can be of service. Reach out today!