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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 EconomyMontreal, 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
Mainstream
CDCU
CDCUs are part ofTwo Movements
Credit Unions
CDFIsCDCUs
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:
– Provide capital– Technical Assistance and management support– Regulatory advocacy– Innovative programs to serve low-income people
2. ONE, TWO, THREE CRISES! Everything is connected!
#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
• 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.U.S.Central
Regional “Wholesale” CUs
Local CUs
Mortgage-BackedSecurities
Investment losses flow down.U.S.Central
Regional “Wholesale” CUs
Local CUs
Mortgage-BackedSecurities
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
• 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
3. OBAMA ADMINISTRATION SUPPORT
“It could have been worse, except for…”
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
4. LESSONS LEARNED. THE WAY FORWARD.
Silver Linings from the Crisis
Resilience! “That Which Does Not Kill Us
Makes Us Stronger!”
• 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/CEONational Federation of
Community Development Credit Unions 39 Broadway, 21st Floor
New York, New York 10006 212.809-1850 / fax: 212-809-3274
