Financial Cooperatives and the Financial Crisis: The U.S. Experience

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 • One, Two, Three Crises! • Public Policy: Obama Administration Support • 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

CDCUs are part ofTwo Movements CreditUnions 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: • 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 • 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…

… and into capital markets. Mortgage-Backed Securities

Investment losses flow down. Mortgage-Backed Securities

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

“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!” • 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 FloorNew York, New York 10006 212.809-1850 / fax: 212-809-3274www.cdcu.coop crosenthal@cdcu.coop

Financial Cooperatives and the Financial Crisis: The U.S. Experience