CONTINUOUS LEARNING. INDUSTRY ENGAGEMENT.
FIA / CUIA - Empowering CUDIC - Beyond FICOM's Shadow
CUDIC has outgrown legacy legislation and FICOM’s shadow. CUDIC is responsible for deposit insurance of a C$77 billion industry that is used by almost half of British Columbians. Larger than most Canadian credit unions then it warrants full-time, permanent executive leadership. Larger than most B.C. Crown Corporations then it deserves independent, empowered and accountable governance oversight.
“CUDIC has outgrown legacy legislation and FICOM’s shadow. CUDIC is responsible for deposit insurance of a C$77 billion industry that is used by almost half of British Columbians. Larger than most Canadian credit unions then it warrants full-time, permanent executive leadership. Larger than most B.C. Crown Corporations then it deserves independent, empowered and accountable governance oversight.”
CONTEXT
The following submission was authored by Ross McDonald, in a personal capacity, in response to the Second Public Consultation Paper of a legislative review by the Ministry of Finance of the B.C. provincial government. Under the review, the Ministry of Finance sought public submissions by 19 June 2018. The legislative review considers changes to the Financial Institutions Act and the Credit Union Incorporation Act. This submission provides four recommendations on a targeted subset of relevant topics. Recommendations per this submission are aligned with stated legislative objective and collectively offer policy ideas that have the potential to courageously transform the regulatory environment of B.C. credit unions for the benefit of industry, government, taxpayers and employees.
Ross wishes to thank various credit union system veterans that kindly volunteered leadership inspiration, technical insight and professional encouragement. Thank you, appreciated.
This submission may be easier to read in PDF format. Download per bit.ly/fia-cuia-rm-pdf
EXECUTIVE SUMMARY
This personal submission to the FIA/CUIA Review seeks to frame an alternative regulatory structure for B.C. credit unions. Specifically, the submission provides four recommendations:
Recommendation 1 - Roles & Responsibilities
Transfer the mandate for prudential supervision, including completion of risk-based assessments and determination of deposit insurance premiums, of B.C. credit unions and credit union centrals from FICOM to CUDIC. Terminate any requirement that CUDIC be administered by FICOM.
Recommendation 2 - Legal Entities
Establish CUDIC as a Crown agency. Retain FICOM as branch of the Ministry of Finance. Collaborate with industry to review the legislative mandate, appropriate sustainable resources, and any potential merger of Stabilization Central Credit Union.
Recommendation 3 - Leadership & Governance
Appoint permanent executive and an independent, empowered governance body to provide leadership and oversight of CUDIC. Related competency matrices and governance processes should reflect CUDIC financial size, technical complexity and systemic role. CUDIC Board should adopt, and strive for excellence in, relevant governance best practices.
Recommendation 4 - Public Accountability
Regardless of their legal entity structure then FICOM and CUDIC should, as separate organizations, be subject to the “Performance Reporting Principles” and “Taxpayer Accountability Principles” as published by the B.C. government.
The recommendations are aligned with the primary objective of the legislative and regulatory framework “to maintain stability and confidence in the financial services sector by reducing the risk of failures and providing consumer protection and supporting objectives.” Related execution would necessitate short-term legislative change and organizational restructuring. Some portion of this work may be already actively engaged given the initial recommendations by the B.C. Ministry of Finance.
The recommendations recognize the current size, elevated complexity, resource challenges and peer jurisdiction approaches in regards regulatory oversight of credit unions. Recommendations may create significant benefits to government, to industry and to the public over a medium-term basis. Given numerous, diverse and substantive externalities that face the credit union industry, the recommendations may position the regulatory oversight for the coming decade until the next legislative review.
The author believes that credit unions contribute materially to the economy, employment and communities of B.C. This submission is motivated by personal appetite for a strong and sustainable B.C. credit union industry; for an effective, efficient and appropriate regulatory structure; for best practice adoption in regards governance oversight and public accountability.
RECOMMENDATION 1 - ROLES & RESPONSIBILITIES
Recommendation: Transfer the mandate for prudential supervision, including completion of risk-based assessments and determination of deposit insurance premiums, of B.C. credit unions and credit union centrals from FICOM to CUDIC. Terminate any requirement that CUDIC be administered by FICOM.
B.C. has the largest provincial credit union system in Canada. As at 31 December 2017 then B.C. credit unions reported C$77 billion of assets, C$66 billion of member deposits and 2.0 million members that represent over two-fifths of the provincial population. Three of the top five Canadian credit unions are located in British Columbia. The B.C. credit industry is growing. Between 2005 and 2017, B.C. credit union assets increased from C$36 to C$77 billion and membership increased from 1.5 to 2.0 million.
Over recent years, credit union operations have increased in complexity. Elevated consumer expectations, heightened competition and evolving technological innovation have necessitated significant investment by credit union organizations in digital channels, product offerings and operational efficiency. Increased scale may have permitted increased sophistication by larger B.C. credit unions. For example, between December 2007 and 2017, the total assets of Vancity Credit Union increased from C$14.1 to C$21.7 billion (Source: Vancity CU).
The B.C. credit union industry and its regulator gained national, systemic impact. In recognition of its importance to Canadian credit unions then, in 2014, FICOM designated Central 1 Credit Union as a Domestically Systemically Important Financial Institution. As such, it subject to commensurately elevated regulatory requirements and prudential supervisory expectations. Between 2005 and 2017, Central 1 Credit Union assets increased from C$5 to C$18 billion. While asset growth includes a 2008 merger with Credit Union Central of Ontario then the majority of asset growth was driven by higher member deposits at B.C. credit unions. As of 1 January 2017, responsibility for regulatory oversight of Central 1 Credit Union passed from the federal Office of the Superintendent of Financial Institutions to FICOM. Central 1 Credit Union holds mandatory liquidity deposits for all B.C. and some ON credit unions. It provides wholesale payments, treasury and numerous other services to credit unions nationwide. The nature and complexity of its operations, and therefore its regulatory policies and prudential supervisory approach, are materially different from that of a credit union.
FICOM does not appear to have the operational capabilities to fulfil its mandate in regards credit union prudential supervision. In 2016, the BC Auditor General concluded that “FICOM may not be able to detect a worsening situation at a credit union in time to address and reduce the risk of failure.” This expert, independent determination strikes at the heart of the prudential supervision function. FICOM Supervisory Framework publication states that “the objective of FICOM’s supervision is to reduce the likelihood that a provincially regulated financial institution will fail.”
Over recent years, FICOM appears to have completed a very small number of supervisory reviews of credit unions. B.C. has 42 credit unions. The 2014 BC Auditor General report stated that “With their shortage of staff, it would take over 14 years to review all of BC’s credit unions instead of FICOM’s intended target of two to three”. It could be inferred that FICOM completed supervisory reviews of three credit unions (42 divided by 14), or equivalents thereof, each year. This compares to the 14 to 21 credit unions, or equivalents, that require prudential supervisory reviews annually to achieve FICOM’s target. The 2016 BC Auditor General report stated that “FICOM’s actions to address its staffing shortage are not working. FICOM has further reduced the number of credit union reviews it will do each year”. This suggests that FICOM prudential supervision team may review each credit union once every couple of decades or so. This frequency of review compares extremely poorly to regulatory standards in other jurisdictions and in other regulated industries. The lack of timely supervisory assessments of credit unions may increase deposit insurance risks for B.C. taxpayers, given current unlimited deposit insurance policy.
“FICOM may not be able to detect a worsening situation at a credit union in time to address the risk of failure.”
The extent of FICOM’s responsibilities are materially greater than those of peer provincial regulatory entities. FICOM regulates multiple industries - credit unions, trust companies, insurance companies, real estate, mortgage brokers, strata properties and pension plans. FICOM performs substantially all regulatory function for B.C. credit unions. Specifically FICOM - inclusive of CUDIC - is responsible for regulatory policy, statutory approvals, prudential supervision, deposit insurance and market conduct. Most, if not all, other Canadian provincial regulatory structures use multiple organizations to perform equivalent industry coverage and functional responsibilities.
Despite FICOM’s multi-year resource challenges, its authority was recently further extended. In 2017, the BC Ministry of Finance tasked FICOM with the new function of Office of the Superintendent of Real Estate, a seemingly prominent and impactful role given the substantive recommendations of the B.C. Government’s Independent Advisory Group.
The B.C. Ministry of Finance should revisit any business case that requires CUDIC to outsource its administration and/or operations to FICOM. The BC Ministry of Finance FIA/CUIA March 2018 recommendations state that “CUDIC was merged with FICOM in 1990 to allow expertise to be pooled; that pooling of expertise continues to be relevant and important today.” At that time then both FICOM and CUDIC were startup organizations, perhaps with an all-hands-on-deck mindset. But CUDIC and FICOM are now mature organizations. The rationale of pooled expertise between FICOM and CUDIC may reflect legacy pragmatism rather than current circumstances or future needs of the B.C. credit union industry and related regulation.
FICOM operational capabilities to set regulatory policy for credit unions appear effective under the current organizational structure. Since the prior FIA/CUIA review then FICOM has introduced, and updated, a significant number of regulatory guidelines. It has also progressed multiple adhoc initiatives, such as stress tests, in efforts to assess industry risk and/or to enhance credit union capabilities.
RECOMMENDATION 2 - LEGAL ENTITIES
Recommendation: Establish CUDIC as a Crown agency. Retain FICOM as branch of the Ministry of Finance. Collaborate with industry to review the legislative mandate, appropriate sustainable resources, and any potential merger of Stabilization Central Credit Union.
The size of CUDIC net income may warrant it being a standalone organization. For the year to March 2017, CUDIC net income of C$57 million. Such earnings are large relative to a) BC’s largest credit unions, b) aggregate earning of BC credit unions, and c) many BC Crown corporations. For comparison, Coast Capital Savings Credit Union reported C$58 million net income in the year to December 2016. In the same period, BC credit unions collectively reported net income of C$263 million. Over recent years then net income of CUDIC relative to that of BC credit unions has increased materially, from 13% to 22%, principally due to material increases in deposit insurance premiums. Investment returns from the CUDIC deposit insurance portfolio funds FICOM operations.
The size of CUDIC assets may warrant it being a standalone organization. Between December 2007 and 2017, CUDIC assets increased from C$230 to C$596 million (Source: CUDIC). CUDIC assets have grown materially through higher system deposits, elevated funding policy target and fund transfer.
The B.C. Ministry of Finance should revisit its seeming business case for FICOM’s expansive mandate scope and instead prioritize effective structure, functional excellence and public accountability. The BC Ministry of Finance should strive to identify, and to adopt, best practices in regards the regulatory structures for credit unions. With the exception of BC then most, if not all, regulatory structures in other Canadian provinces separate regulatory functions into multiple organizations. Typically, regulatory policy and statutory approvals are performed by a provincial government organization, while deposit insurance and prudential supervision are executed by a provincial crown corporation (commonly a ‘Credit Union Deposit Guarantee Corporation’).
CUDIC prudential supervision may enable a simple, transparent funding model. The B.C. credit union industry would directly fund the majority of regulatory costs, including prudential supervision activities, through deposit insurance premiums to CUDIC, while the B.C. Ministry of Finance and/or stakeholders would fund residual FICOM functions. Most, if not all, monetary transfers between CUDIC and FICOM, and between FICOM and the BC Ministry of Finance, would terminate. The current funding model may be needlessly complex and appears significantly different from practices in other provinces.
“The B.C. Ministry of Finance should revisit it seeming business case for FICOM’s expansive mandate scope and instead prioritize effective infrastructure, functional excellence and public accountability.”
Legal separation between FICOM and CUDIC may be beneficial to government, industry, taxpayers and employees. The competency matrix, staffing requirements and labour market rates across the regulatory functions likely vary materially. There may be some functions that are performed to a higher standard; with greater timeliness; or on a cost-effective basis by public servants employed by the B.C. Ministry of Finance. For example, public servant direct access to B.C. government resources may provide clarity of discussions towards better and/or more timely decisions for statutory approvals. B.C. Ministry of Finance may seek to have direct input - perhaps to partly mitigate its deposit insurance risk - into processes that introduce, edit, or alter the intensity of regulatory policies. Employees may benefit from legal separation of FICOM and CUDIC as some current FICOM employees may prefer to remain in the public service.
Risk assessment responsibility and related funding source were significantly migrated from industry to government. In 2005, the relationship between FICOM/CUDIC and Stabilization Central Credit Union (‘SCCU’) - an entity owned and governed by B.C. credit unions - was significantly revised and “this resulted in the Stabilization Fund being reduced by $83 million to approximately $30 million, with the CUDIC deposit insurance fund increased by a like amount.” (Source: SCCU 2005 Annual Report). “These new arrangements restrict the flow of information between Stabilization Central and FICOM/CUDIC, with the result that Stabilization Central’s role in assessing risk is more limited” (Source: SCCU 2005 Annual Report). The 2005 fund $83m transfer was transformative in size relative to then asset sizes of CUDIC and SCCU.
SCCU should be considered as part of any regulatory restructuring. SCCU has a legislative mandate to act as the stabilization authority to B.C. credit unions. SCCU - owned, governed and operated by industry - appears to provide a valuable force for betterment in the credit union system. It advises specific credit unions that voluntarily choose, or have been required by FICOM, to initiate organizational changes. It promotes best practices across B.C. credit unions. In an environment of increased complexity and elevated regulations then it may act as an informed, cost-effective and trusted counsellor to boards of directors of B.C. credit unions - especially those of small and medium size. Its role contributes to the mitigation of deposit insurance risk. Annual reports of, and the 2015 FIA/CUIA submission by, SCCU disclose deliberations by its board in regards organizational viability and potential merger partners. They also highlight significant desire for a clearly defined, appropriately informed and credibly sustainable role. SCCU could play various future roles. Its functional responsibilities could be extended. Its legal status could remain as a standalone entity or be merged with Central 1 Credit Union or CUDIC. This submission does not consider related matters or propose specific recomendation(s). The B.C. Ministry of Finance should collaborate with industry to critically assess the business case, alternative strategic options, and effective future role of SCCU.
RECOMMENDATION 3 - LEADERSHIP & GOVERNANCE
Recommendation: Appoint permanent executive and an independent, empowered governance body to provide leadership and oversight of CUDIC. Related competency matrices and governance processes should reflect CUDIC financial size, technical complexity and systemic role. CUDIC Board should adopt, and strive for excellence in, relevant governance best practices.
By virtue of legacy legislation, CUDIC has never had dedicated executive leadership. The Superintendent of Financial Institutions also holds the official capacities of Superintendent of Pensions, Registrar of Mortgage Brokers, Superintendent of Real Estate plus CUDIC Chief Executive Officer. The CUDIC Executive Director, and limited CUDIC staff members, are FICOM employees. FICOM completes executive functions, such as establishment of the deposit insurance fund target policy, on behalf of CUDIC (Source: CUDIC annual report). FICOM staff provide significant operational services and administrative support to CUDIC.
For over two years, FICOM absence of permanent executive leadership has impacted CUDIC. Carolyn Rogers resigned as Superintendent of Financial Institutions in May 2016. Jeffrey Wu, Executive Director CUDIC, left FICOM at a similar date. Since that time FICOM has been led by an Acting Superintendent, Acting Superintendent Regulation, Acting Deputy Superintendent Prudential Supervision and Acting Deputy Superintendent Market Conduct. FICOM corporate functions are directed by an Interim CEO. Day to day operations of CUDIC are overseen by a FICOM employee that was appointed Acting Executive Director CUDIC.
CUDIC deserves full-time, permanent executive leadership:
its organizational size is larger than most B.C. credit unions and most B.C. crown corporations
its operating environment - the B.C. credit union industry - has increased materially in terms of size and complexity
its impact on supervisory risk assessments, and potential remedial interventions, to B.C. credit unions may be significant
its leadership competency matrix - including technical expertise, management skills and stakeholder relationships - may differ significantly from that required to set regulatory policy or assess statutory approvals
its responsibilities and resources, subject to above recommendations, may increase materially
By virtue of legacy legislation, CUDIC has never had dedicated governance oversight. Members of the FICOM Commission also act as Board Directors of CUDIC. As at March 2018, there were six appointed members of the FICOM Commission. It may be indicative of the conjoined relationship, of limited resourcing and/or of perceived functional priorities that CUDIC appears not to have submitted a response to the 2015 Initial Public Consultation Process of the FIA / CUIA consultation review. Were this the case then its Board of Directors should justify why CUDIC elected not to offer thought leadership, policy opinion and/or regulatory input on legislative matters at the core of its organizational purpose.
CUDIC Board may have mismatched competencies. Conjoined governance of FICOM and CUDIC implicitly requires compromise in appointee selection. Competency matrices are commonly used by a Board of Directors to balance its collective professional experience, environmental or contextual knowledge and personal attributes and skills. FICOM provides regulatory oversight for multiple industries including credit unions, insurance, trusts, pensions, real estate and mortgage brokers. FICOM Commission members presumably have appropriate expertise and experience across these industries, and understanding of related regulatory issues. Implicitly then only a subset of that expertise, experience and skills are relevant to credit unions and to CUDIC. Yet the CUDIC Board and FICOM Commission have identical membership.
Diverse conflict of interest requirements may limit the candidate pool for CUDIC Board. The Board Resourcing and Development Office related posting stated that “to be considered as a [FICOM] Commission member an individual must not have any real or perceived conflict of interest with the industries or institutions regulated by FICOM.” The conjoined governance structure therefore means that a candidate with a potential conflict of interest in the pension, mortgage broker, insurance or real estate industry is automatically prohibited from providing governance oversight of CUDIC and its credit union mandate.
CUDIC has outgrown legacy legislation and FICOM’s shadow. The size, complexity and impact of the B.C. financial services industry is material. Largely devised in the late 1980s then legacy legislation in regards leadership and governance of CUDIC may be outdated. CUDIC is responsible for deposit insurance of a C$77 billion industry that is used by almost half of British Columbians. Larger than most Canadian credit unions then it warrants full-time, permanent executive leadership. Larger than most B.C. Crown Corporations then it deserves independent, empowered and accountable governance oversight.
CUDIC Board should have the authority - and the resultant responsibility - to appoint and to assess its Chief Executive Officer and to develop executive compensation plans. Multiple governance experts identify CEO selection as a key function:
‘Selecting the chief executive officer and planning for CEO succession are among the most important responsibilities of a company’s board of directors.’ - Harvard Law School Forum for Corporate Governance & Financial Regulation ‘Advice for boards in CEO Selection and Succession Planning’
‘Choosing the next CEO is the single most important decision a board of directors will make.’ - Harvard Business Review, ‘The Art and Science of Finding the Right CEO’
‘During a CEO search process, boards might do well to keep their long knives sheathed because, in fact, real leaders are threatening to those intent on preserving the status quo’ - Harvard Business Review, ‘Don’t Hire the Wrong CEO’
CUDIC Board should demonstrate leadership to credit unions through its compliance with governance best practices.
RECOMMENDATION 4 - PUBLIC ACCOUNTABILITY
Recommendation: Regardless of their legal entity structure then FICOM and CUDIC should, as separate organizations, be subject to the “Performance Reporting Principles” and “Taxpayer Accountability Principles” as published by the B.C. government.
“Political accountability is the accountability of the government, civil servants and politicians to the public and to legislative bodies”
Governance bodies that oversee public service organizations are typically obligated to publish service plans, annual reports and other documents to public stakeholders. Disclosures may be driven by legislative requirement, government expectations or voluntary engagement.
Substantially all Canadian financial regulatory agencies appear to make extensive public disclosures. For example, Credit Union Deposit Guarantee Corporation - typically responsible for deposit insurance and prudential supervision functions in peer provinces - publish annual reports that are comparable to a public company. Such reports may contain some or all of audited financial statements; management discussion and analysis; CEO and Board reports; executive team profiles; governance practices; industry developments; regulatory updates; supervisory performance metrics; and/or executive compensation.
Public disclosures by FICOM and/or CUDIC appear to be negligible. Neither FICOM nor CUDIC publish an annual report or similar document that provides insight and rationale into goals, achievements, risks, key decisions, financial performance and/or other information. CUDIC publishes limited annual financial statements. As a ministry branch, FICOM disclosures could potentially be provided in the service plans and other reports published by the B.C. Ministry of Finance. But the most current Annual Service Plan Report (2015-2016) published by B.C. Ministry makes no reference whatsoever in regards financial statements, performance metrics or any other information for either FICOM or CUDIC.
Regardless of their legal entity structure, both CUDIC and FICOM should initiate compliance with the B.C. Performance Reporting Principles. In 2003, the B.C. government established “Performance Reporting Principles For the British Columbia Public Sector”. The related publication frames eight principles of deemed best practice that were approved by the Auditor General of B.C. The principles seek to support an open and accountable government.
FICOM should dislose, and provide credible rationale, to industry and to the public its plan to achieve key organizational goals. For example, the 2018/19 to 2020/21 Service Plan of the B.C. Ministry of Finance establishes a performance target for FICOM that, in 2017/18, 85% of financial institutions have a supervisory assessment completed in the prior three years.
In June 2014 “Taxpayers Accountability Principles”, the B.C. government introduced a new expectation “for deputy ministers ... to hold the entity [B.C. public service organization] accountable for the outcomes and measurements identified by the minister responsible, in consultation with the respective board chair.”
Executive leadership is obligated to make difficult decisions. This is the case in industry, government and communities. Some decision may involve topics that have high complexity, elevated sensitivity, material implications, accelerated timeline and/or significant subjectivity. Decisions may impact the organization, employees, communities and other stakeholders. Decisions may be made with imperfect information, unknown external forces and without the benefit of hindsight. Regardless, executive leadership and related governance body should be accountable to stakeholders for the resulting outcomes.
“The Taxpayer Accountability Princples state that ‘Board members act independently from the organization’s executive and have the best interests of taxpayers and shareholder as their primary consideration.’”
For example, FICOM executive and governance body should be accountable for decisions to return millions of dollars to B.C. general revenues rather than spend it on mandate fulfilment and/or operational betterment. Related funds were ultimately sourced from credit union deposit insurance premiums. Gerry Kyllo, MLA, neatly captured the situation in a Select Standing Committee - observing that FICOM executive faced multiple options and, regardless of whether “it’s a wrong decision”, a distinct choice was made. That such disclosures result from adhoc testimony to public officials rather than from routine stakeholder engagement processes may conflict with the intent of the Taxpayers Accountability Principles. Respectful of their primary consideration, FICOM Commission should routinely report to the public details of important goals, decisions and perfomance of FICOM and provide related rationale on how it perceives key aspects to reflect the best interests of taxpayers.
The funding basis and governance model of credit union regulation may be subject to a principal-agent gap. Despite industry funding FICOM/CUDIC operations then its contribution to related governance, and its receipt of perfoamnce disclosures, are both minimal and contary to practices in peer provinces. Lack of industry participation in oversight may have denied due challenge to FICOM Commission and executive. The 2015 submission to the FIA/CUIA consultation process by the B.C. credit union system noted that “as the funder of CUDIC, credit unions should have a greater voice in its governance.”
REFERENCES
Selected Deposit Insurance Organizations
CUDIC (BC) - http://www.cudicbc.ca
CUDGC (AB) - http://www.cudgc.ab.ca
CUDGC (SK) - https://www.cudgc.sk.ca/about-us/
DGCM (MB) - http://depositguarantee.mb.ca/home/
DICO (ON) - http://www.dico.com
CDIC (Federal) - https://www.cdic.ca
Stabilization Central Credit Union - https://www.stabil.com/
Government References
FICOM - Supervisory Framework - https://www.fic.gov.bc.ca/pdf/aboutus/FICOMSupervisoryFramework.pdf
B.C. Government - “Taxpayer Accountability Principles” - https://www2.gov.bc.ca/assets/gov/british-columbians-our-governments/services-policies-for-government/public-sector-management/taxpayer-accountability-principles.pdf
B.C. Government - “Performance Reporting Principles” - https://www2.gov.bc.ca/assets/gov/british-columbians-our-governments/services-policies-for-government/public-sector-management/performance_reporting_principles.pdf
BC Select Standing Committee on Public Accounts - Draft minutes, October 2016 - https://www.leg.bc.ca/documents-data/committees-transcripts/20161005am-PublicAccounts-Vancouver-Blues
B.C. Ministry of Finance - “2015/16 Annual Service Plan Report” - http://www.bcbudget.gov.bc.ca/Annual_Reports/2015_2016/pdf/ministry/fin.pdf
B.C. Ministry of Finance - “2018/19 – 2020/21 Service Plan” - http://bcbudget.gov.bc.ca/2018/sp/pdf/ministry/fin.pdf
Federal Department of Finance and Treasury Board of Canada - “Directors of crown corporations: an introductory guide to their roles and responsibilities” - http://publications.gc.ca/collections/collection_2016/fin/BT77-1-1993-eng.pdf
Statistics Canada - 2016 Census data - https://www12.statcan.gc.ca/census-recensement/2016/dp-pd/hlt-fst/pd-pl/Table.cfm
Sources Referenced in Submission
Canadian Credit Union Association - Top 100 Credit Unions, Q4 2017 - https://www.ccua.com/~/media/CCUA/About/facts_and_figures/documents/Largest%20100%20Credit%20Unions/top100-4Q17_12-Apr-18.pdf
Canadian Credit Union Association - System Results, Q4 2017 - https://www.ccua.com/~/media/CCUA/About/facts_and_figures/documents/Quarterly%20National%20System%20Results/4Q17SystemResults_14-Mar-18.pdf
Harvard Law School Forum on Corporate Governance and Financial Regulation, ‘Advice for boards in CEO Selection and Succession Planning’ - https://corpgov.law.harvard.edu/2012/06/11/advice-for-boards-in-ceo-selection-and-succession-planning/
Canadian Coalition for Good Governance - ‘Building High Performance Boards’ - https://www.ccgg.ca/site/ccgg/assets/pdf/building_high_performance_boards_august_2013_v12_formatted__sept._19,_2013_last_update_.pdf
McKinsey & Company - “The CEO Guide to Boards” - https://www.mckinsey.com/featured-insights/leadership/the-ceo-guide-to-boards
FIA/CUIA System Response - http://www.fin.gov.bc.ca/pld/files/BC%20Credit%20Union%20System%20Response.pdf
Wikipedia - Accountability - https://en.wikipedia.org/wiki/Accountability
DISCLAIMER & COPYRIGHT
This article reflects the personal recommendations and statements of the author, Ross McDonald. It is wholly intended to assist the B.C. Ministy of Finance as part of the FIA/CUIA Public Consultation. This article does not represent the views of any financial cooperative, corporate organization, regulatory body or government ministry. All content is wholly based on information that is in the public domain. Where relevant, sources have been identified and referenced.
Although the author has made significant effort to ensure that the information in this submission was accurate at the date of completion then the author does not assume any liability to any party for any loss, damage, or disruption caused by errors or omissions, whether such errors or omissions result from negligence, accident, or any other cause.
All rights reserved.
Credit Union Deposit Insurance Policy - 2/2 - Costs, Benefits & Regulation
There are seemingly three policy options for deposit insurance for B.C. credit unions - Maintain unlimited coverage, Reintroduce limited coverage, Seek provincial alignment. There does not appear a right or wrong policy. But there are policy choices and resultant implications for the B.C. credit union system.
“There are seemingly three policy options for deposit insurance for B.C. credit unions - Maintain unlimited coverage, Reintroduce limited coverage, Seek provincial alignment. There does not appear a right or wrong policy. But there are policy choices and resultant implications for the B.C. credit union system.”
SERIES OVERVIEW
This article is the second part of a two-part series related to deposit insurance applicable to Canadian credit unions.
Overview, History & Pros/Cons: Policy in B.C. & Canada. Unlimited vs limited
Implications & Options: Benefits, cost & regulatory impact. Three policy choices
This series was substantially authored to aid an executive search process. Several system veterans kindly volunteered technical expertise, system memory, and professional guidance. Thank you. Their wisdom, perspective and encouragement were invaluable.
The first article introduced deposit insurance; outlined policy in multiple jurisdictions; and summarized generic pros/cons of limited vs unlimited deposit insurance policies.
This second article has two broad components. First, the implications of unlimited deposit insurance in terms of benefits, costs and regulation. Second, three discrete policy options and recent public positions of the B.C. credit union system. Given subject matter complexity, subjectivity and sensitivity then the author has leveraged significant graphical analysis in efforts to enhance explanation and to aid assessment. Some presented data is marginally stale but this is not believed to impact key themes.
This publication may be easier to read in PDF format. Download per http://bit.ly/dep-ins-pdf
IMPLICATIONS: BENEFITS OF UNLIMITED DEPOSIT INSURANCE
The benefits to B.C. credit unions of a regime of unlimited deposit insurance are broad in nature, and may include -
Market confidence - Growth in collective membership size and deposit amounts at B.C. credit unions
Large depositors - Growth in number or magnitude of deposits that exceeded insurance coverage in other jurisdictions
In-province deposits - Retention of deposits of B.C. members by B.C. credit unions
Depositor Eligibility - it permits institutional entities, such as MUSH (municipal, university, schools and hospitals), to make deposits. Such entities may require that a financial institution have unlimited deposit insurance or a credit rating
Policy simplicity - Members may easily apply unlimited deposit insurance to their circumstances
Between 2007 and 2016 then the B.C. credit union system expanded its membership and attracted larger depositors. System membership increased by over 300,000, from 1.6 to 1.9 million. B.C. member deposits increased from C$36 to C$63 billion. The average member deposit increased from C$22,000 to C$32,000. A range of economic, market and external factors are potential drivers but the dates are also concurrent with the introduction of unlimited deposit insurance. It is possible that unlimited coverage provided members with increased confidence to join, and place higher deposit amounts, with B.C. credit unions.
Unlimited deposit insurance may provide a significant competitive advantage. Three Canadian provinces - BC, SK, MB - have credit union membership that represents in excess of 40% of the population. Each of these provinces has a regime of unlimited coverage. In contrast then Ontario credit union membership represents approximately 10% of its population. The modest market share of credit unions in Alberta and Ontario may be due to the likely strong competition from locally headquartered entities of ATB Financial and Canadian banks respectively.
“B.C. member deposits increased from C$36 to C$63 billion. The average member deposit increased from C$22,000 to C$32,000.”
Unlimited deposit insurance may have attracted larger depositors. At December 2015 then four provinces, each with unlimited coverage, have average credit union deposits in excess of C$30,000 while Ontario credit unions report less than C$25,000. Caution is appropriate with statistics. Higher average member deposit could indicate that many members have increased their deposits or suggest that a modest number of members, perhaps non-consumer, have placed outlier large deposits.
Limited data available in regards the retention of B.C. deposits in B.C. credit unions. It may be notable that, at December 2015, over half of the C$4.2 billion deposits at Concentra Financial were from Ontario customers.
IMPLICATIONS: COSTS OF UNLIMITED COVERAGE
Quantifying the cost of unlimited deposit insurance is tricky. Unlike typical insurance products, the buyer cannot seek a quotation from an alternative service provider or consider costs under multiple coverage insurance terms. Quantifying alternative deposit regimes is beyond the remit of this brief article. But comparable metrics of deposit funds may provide insight -
Historical B.C. levels - Fund levels prior to the introduction of unlimited coverage for B.C. credit unions
Other ‘unlimited’ provinces - Fund levels in other Canadian provinces that offer unlimited deposit insurance
‘Limited’ coverage entities - Fund levels applicable to deposit taking institutions subject to limited deposit insurance
Following the introduction of unlimited coverage, the cost of deposit insurance increased materially. Between 2007 and 2016 then B.C. deposit insurance funding increased from 76 to 95 basis points of member deposits at credit unions. Per current insurer targets then funding is expected to reach 118 basis points by 2021. Higher basis point funding can be associated with an insurer perception of elevated expected loss, say from increased claim sizes (exposure at default) or higher probability of claim (probability of default) that may arise from unlimited deposit coverage or challenging economic conditions.
The B.C. policy may be funded to a lesser extent than funds in provinces with similar coverage. Three other Canadian provinces offer unlimited insurance and each has a higher level of fund size, in terms of basis points of than that of B.C. Relative to its peers then annual assessments may rise the greatest in B.C. as it is currently furthest from its target funding levels.
As is typical of insurance, the fund capital is proportional to insurable risk. For deposit taking institutions, such as credit unions, the size of ex-ante fund increases with the magnitude of insurable deposits and so indirectly by deposit insurance policy. Ontario credit unions, federal credit and banks are each subject to C$100,000 deposit insurance. Related deposit insurer funds are, in basis points terms, materially smaller than in any of the provincial funds that provide unlimited insurance.
“Following the introduction of unlimited coverage, the cost of deposit insurance increased materially.”
While the cost of unlimited coverage requires significant analysis, the author suggests a few ballpark frames of reference-
Were 2007 funding (76bp) effective in 2016 then B.C. credit unions may have an estimated C$100 million more capital
Were 2016 ex-ante funding metrics in B.C. consistent with Ontario then the B.C. funds could be smaller by almost C$200 million
The forecasted increase in target fund levels may account for approximately C$15 million of annual CUDIC assessments
Published 2012 target funding may require continuance or escalation of CUDIC assessments at 18% of system earnings
IMPLICATIONS: REGULATION AND DEPOSIT INSURER
The author considers that unlimited deposit insurance for B.C. credit unions includes discrete financial implications:
Large depositors* - Growth in number or magnitude of high-value deposits enables lending but may increase liquidity risk
Annual premiums* - Elevated exposure at default increases insurance assessments to build a larger investment pool
Opportunity cost* - A larger insurance fund dilutes current earnings and reduces capital adequacy of credit unions
Market confidence** - Growth in membership size and deposit amounts at B.C. credit unions
In-province deposits** - Policy competitiveness encourages retention of deposits of B.C. members by B.C. credit unions
Regulatory compliance** - Insurance risk supports regulatory guideline issuance and supervisory expectation intensity
* High probability, ** Medium probability (author assessment)
CUDIC 2016 assessments represented 18% of the net income of the B.C. credit union system. This proportion is up from 14% in 2014. CUDIC assessments appear to wholly increase its investment asset pool. Between 2014 and 2016 then CUDIC investment portfolio returns have exceeded all expenses and taxes. CUDIC expenses include approximately $5 million charged, but significantly unspent, by FICOM. Deposition by Tara Richards, FICOM Acting CEO, to the B.C. Legislative Assembly states that ‘with the shortage of staff, we have a surplus ... of $3.5 million to $5 million on an annual basis. Last year [to 31 March 2015], for the record, the recovery [unspent income returned to B.C. government general fund] was $4.8 million’.
The B.C. ex-ante deposit insurance funds have increased in size relative to the aggregate capital of B.C. credit unions. In 2007 then the asset pools represented 12.2% of system capital but this had increased to 14.6% in 2016. Were the equity of Coast Capital Savings Credit Union excluded, assuming its future achievement of federal charter without CUDIC coverage, then the insurance asset pools would represent almost 20% of system. Payments by B.C. credit unions to CUDIC reduce their net income and, over time, retained earnings and capital adequacy.
In recent years regulatory compliance costs of B.C. credit unions may have increased materially. Based on the substance and frequency of regulatory guidance issuance the level of oversight appears to have expanded at an ever greater rate. Between 2013 and 2016 FICOM issued seven Guidelines; required extended reporting on various topics; and executed several system-level initiatives, such as stress tests. Some Guidelines issued by FICOM have resulted from task force or other consultative processes that involved executives, board members or advisors from B.C. credit unions.
CONCLUSION: POLICY OPTIONS
Option 1 - Maintain current unlimited deposit insurance regime
The current regime may have supported growth, reinforced strength and showcased confidence within the B.C. credit union system. During the current regime period then membership size and deposit amounts collectively at B.C. credit unions have increased by 19% and 72% respectively. Unlimited insurance appears to have attracted larger depositors, with average member deposits increased by 45%. System capital has increased by 78%. All Western Canadian provinces offer unlimited coverage.
The B.C. credit union system and most individual credit unions to be materially supportive of the current regime.
But an elevated level of moral hazard may enable inappropriate risk appetite, insufficient risk management or unsound business practices by B.C. credit unions. The regime is increasingly expensive. Assessments drain 18% of credit union system earnings. The ex-ante funds represent almost 15% of system capital. Regulatory requirements have intensified and compliance costs increased. Unlimited insurance may be acutely costly for credit unions under regulatory intervention.
Option 2 - Reintroduce a limited deposit insurance regime
Many depositors may want rather than need unlimited deposit insurance. Deposit taking institutions with limited deposit insurance have significant levels of uninsured deposits. 30% of deposits in Ontario credit unions are uninsured by DICO. 72% of deposits in banks and federal credit unions are uninsured by CDIC. Yet DICO and CDIC regimes currently apply maximum coverage of C$100,000 per depositor per account type. Per its federal credit union disclosures, fewer than 4% of personal members of Coast Capital Savings Credit Union have deposits that exceed CDIC's limited policy coverage.
The author understands that the current deposit insurance regime was introduced by the B.C. government as a surprise to, rather than at the request of, the B.C. credit union system. The re-introduction of limited deposit insurance could boost credit union earnings, redeploy system capital, simplify consumer expectations and/or ease regulatory burden. This may be welcomed given significant financial margins compression; elevated member expectations and technology investment; the system FIA/CUIA submission theme of ‘every bit of capital counts’; and 2014 and 2016 Auditor General of B.C. findings of resource challenges at the provincial regulator. Credit unions may ensure their adoption of sound risk management practices.
But limited coverage could negatively impact B.C. credit unions. Members with large deposit balances, market confidence sensitivities or depositor profile requirements may migrate their deposits outside of B.C. credit unions. The potential impacts of any material withdrawals from the B.C. credit union system include lending capacity, liquidity position, earnings potential and/or economic growth. Any regime transition need be carefully implemented and thoughtfully communicated to both B.C. credit unions and to their membership.
Option 3 - Seek alignment of deposit insurance regimes across provincial jurisdictions
Few, if any, significant jurisdictions outside Western Canada have deposit insurance regimes that provide unlimited coverage. Some jurisdictions introduced unlimited coverage regimes to consciously have a temporary impact. Credit unions in Ontario, Quebec and Atlantic Canada; all Canadian banks and federal credit unions; and most, if not all, deposit taking institutions in Europe and U.S.A. operate in deposit insurance regime with limited coverage. Federal credit unions will likely gain traction.
There may be an opportunity to concurrently align deposit insurance regimes in Canada. Any use of a deposit insurance regime to attract out-of-province deposits may be contrary to the principle of ‘cooperation among cooperatives’, may encourage in a race-to-the-bottom policy mindset, and/or may concentrate risk within provincial systems with the highest risk appetite. A regime could potentially distinguish between insurance coverage for members that reside in-province versus out-of-province.
But such changes would likely be complex, political and lengthy. Related regimes are enacted in provincial policy design and legislative execution would require buy-in from multiple provincial governments and demand extensive system resource. Some provincial credit union systems may be significantly adverse to the policy concept. A consistent regime between both credit unions and banks is likely infeasible, partly as large Canadian banks are effectively too-big-to-fail.
CONCLUSION: B.C. CREDIT UNION SYSTEM VIEW
Submissions to the B.C. Ministry of Finance FIA/CUIA review provide insight into the related views of B.C. credit unions.
Individual credit unions
The B.C. Ministry of Finance website in regards the FIA/CUIA Consultation process provides weblinks to submissions by ten individual credit unions. This represents approximately one-quarter of the number of B.C. credit unions, and likely a significantly higher proportion of its membership and deposits.
“Input Received from Stakeholders’ document notes that “Overall, most individual credit unions making submissions expressed strong support for retaining unlimited deposit insurance.”
One B.C. credit union, Community Savings Credit Union, provided significant critical commentary and provided details of its historical CUDIC assessments, that increased by 575% between 2008 and 2014. Its submission highlights the ‘subjective assessment by FICOM’ and the 2012 CUDIC methodology change as key related drivers, in addition to the typical impact of increased aggregate member deposit balances.
B.C. credit union system
The credit union system submission reiterates its prior stance in support of a regime of unlimited deposit insurance.
‘The system is thus still united in its position from the last substantive legislative review where it argued “as integral components of their communities and their regional economies, credit unions have played a ... role in providing financial services to public bodies. Each of these public bodies is responsible for raising and administering public monies.'
Further, the system response makes an express recommendation that 'the deposit insurance regime must respect the following five principles:
Maintenance of a competitive credit union system;
Supports provincial money staying in the province;
Recognizes the value of self-regulation in the system;
Is easily understandable by depositors; and
Any transitions must be well thought out and very carefully managed.'
“[B.C.] credit unions had unlimited deposit insurance between 1968-1988 with no evidence of problems.”
CONCLUSION: RECOMMENDATIONS
The author suggests that deposit insurance policy is neither a question of right or wrong, nor of decisions on isolated topics. But rather of choices and their collective implications to all stakeholders. Would B.C. credit unions be more inclined to advocate for limited deposit insurance if it were accompanied by lower CUDIC assessments, rebated CUDIC capital, aligned jurisdictional policies and/or lesser regulatory intensity?
This report is intended as a discussion document. The author expresses no opinion and proposes no recommendation.
This concludes the second article of a two-part series. For reasons of brevity, this report does not significantly consider related implications of current and emergent federal credit unions; the legislative history in jurisdictions other than B.C.; the mandate fulfilment by B.C. deposit insurer(s); the value-for-money of relevant services; or the funding levels, roles and responsibilities, or other matters between CUDIC and SCCU.
REFERENCES
B.C. Deposit Insurance Organizations
CUDIC: Guide to BC Credit Union Deposit Insurance - http://www.cudicbc.ca/pdf/cudic/CUDICGuide.pdf
CUDIC: Target Fund Policy - http://www.cudicbc.ca/pdf/cudic/TargetPolicy.pdf
CUDIC: 2016 Annual Report - http://www.cudicbc.ca/pdf/cudic/CUDICFinancials2016.pdf
Stabilization Central: Annual Reports - https://www.stabil.com/about/
Other Selected Deposit Insurance Organizations
CUDGC (AB) - http://www.cudgc.ab.ca
CUDGC (SK) - https://www.cudgc.sk.ca/about-us/
DGCM (MB) - http://depositguarantee.mb.ca/home/
DICO (ON) - http://www.dico.com/design/0_0_Eng.html
CDIC - https://www.cdic.ca
NCUA - https://www.ncua.gov
B.C. Ministry of Finance
FIA/CUIA Consultations - http://www.fin.gov.bc.ca/pld/fiareview.htm
FIA/CUIA Consultations Stakeholder Summary - http://www.fin.gov.bc.ca/pld/files/Response%20report%20to%20FIA%20review%20initial%20consultation%20paper.pdf
FIA/CUIA System Response - http://www.fin.gov.bc.ca/pld/files/BC%20Credit%20Union%20System%20Response.pdf
FIA/CUIA Response of Community Savings Credit Union - http://www.fin.gov.bc.ca/pld/files/Community%20Savings%20Credit%20Union%20(CSCU).pdf
BC Select Standing Committee on Public Accounts - Draft minutes, October 2016 - https://www.leg.bc.ca/documents-data/committees-transcripts/20161005am-PublicAccounts-Vancouver-Blues
Other References
Coast Capital Savings CU: CUDIC vs CDIC deposit insurance coverage - Report: https://www.coastcapitalsavings.com/SharedContent/documents/OnlineVoting/2016/ContinuanceBooklet.pdf
C.D. Howe Institute, ‘A New (Old) Way of Thinking about Financial Regulation’ (2014) - Report: https://www.cdhowe.org/sites/default/files/attachments/research_papers/mixed/Commentary_401_0.pdf
FDIC: Termination of unlimited deposit insurance - https://www.fdic.gov/news/news/financial/2012/fil12045.html
FSB: Guidance for Developing Effective Deposit Insurance Systems - http://www.fsb.org/wp-content/uploads/r_0109b.pdf
Time: Why ... a Huge Decline in Drivers Licenses - http://time.com/money/4185441/millennials-drivers-licenses-gen-x/
OECD: ‘Financial Turbulence - Some Lessons Regarding Deposit Insurance’ (2008) - Report: http://www.oecd.org/pensions/insurance/41420525.pdf
CATO: ‘The Explicit Cost of Government Deposit Insurance’ (2014) - Report: https://object.cato.org/sites/cato.org/files/serials/files/cato-journal/2014/2/v34n1-8.pdf
FDIC: ‘Deposit Insurance Reform: State of Debate’ (1999) - Report: https://www.fdic.gov/bank/analytical/banking/1999dec/1_v12n3.pdf
CCUA: 2015 Annual Report - https://www.ccua.com/~/media/CCUA/member_corner/publications/pdfs/CanadianCentral_AnnualReport_2015.pdf
World Bank: ‘Deposit Insurance Around The World - Issues of Design and Implementation’ (2008) - Report: https://mitpress.mit.edu/sites/default/files/titles/content/9780262042543_sch_0001.pdf
NBER: ‘Deposit Insurance Around the Globe’ (2001) - Report: http://www.nber.org/papers/w8493.pdf
Book: ‘Stress Tests: Reflections on Financial Crises’ (2014) - Book: https://www.amazon.ca/Stress-Test-Reflections-Financial-Crises/dp/0804138591
ACKNOWLEDGEMENT
The author wishes to thank selected credit union system veterans that generously volunteered technical expertise, system memory and professional guidance. Out of discretion then no names are noted. Thank you. Their wisdom, perspective and encouragement were most appreciated.
DISCLAIMER & COPYRIGHT
This article reflects the personal comments of the author, Ross McDonald. This article does not represent the views of any financial cooperative, corporate organization, regulatory body or government ministry. Comments are wholly based on information that is in the public domain.
Although the author has made every effort to ensure that the information in this article was correct at press time, the author does not assume and hereby disclaim any liability to any party for any loss, damage, or disruption caused by errors or omissions, whether such errors or omissions result from negligence, accident, or any other cause.
All rights reserved.
Credit Union Deposit Insurance Policy - 1/2 - Overview, History, Pros & Cons
A policy of unlimited deposit insurance may have significantly supported system growth and membership confidence. But it is unknown outside of Western Canada, may cause moral hazard, and may be increasingly expensive to credit unions in terms of earnings, capital and compliance.
“A policy of unlimited deposit insurance may have significantly supported system growth and membership confidence. But it is unknown outside of Western Canada, may cause moral hazard, and may be increasingly expensive to credit unions in terms of earnings, capital and compliance.”
SERIES OVERVIEW
This article is the first part of a two-part series related to deposit insurance applicable to Canadian credit unions.
Overview, History & Pros/Cons: Policy in B.C. & Canada. Unlimited vs limited
Implications & Options: Benefits, cost & regulatory impact. Three policy choices
This series was authored earlier in 2017 to aid an executive search process. A formatted PDF of the article series is available on request and will be published in due course. Several system veterans kindly volunteered technical expertise, system memory, and professional guidance. Thank you. Their wisdom, perspective and encouragement were invaluable.
This article has five sections - Executive summary; Deposit insurance; Canadian provincial credit unions; B.C. credit unions; Unlimited vs limited coverage.
Given subject matter complexity, subjectivity and sensitivity then the author has leveraged significant graphical analysis in efforts to enhance explanation and to aid assessment.
This document may be easier to read in PDF format. Download per http://bit.ly/dep-ins-pdf
EXECUTIVE SUMMARY
“Deposit insurance policy may gain prominence due to emergent federal credit unions and a current B.C. legislative review.”
Most credit unions, banks and other deposit taking institutions are legally obligated to maintain deposit insurance. Such insurance refunds depositors in the event of institutional insolvency. An ‘ex-ante’ policy involves the establishment of a fund to subsequently settle claims. Canada has multiple deposit insurers that collectively manage approximately C$5 billion of investment funds. Deposits in B.C. credit unions are covered by Credit Union Deposit Insurance Corporation (CUDIC) and by Stabilization Central Credit Union (SCCU) that collectively manage approximately C$600 million of investment funds.
The coverage terms and resultant cost of deposit insurance vary materially across Canadian deposit taking institutions. Deposi- tors in some institutions, including B.C. credit unions, currently receive insurance to an unlimited amount.
Individual credit unions can mitigate assessment cost through prudent operations, regulatory compliance and good gover- nance. Collectively, credit unions may influence deposit insurance by policy advocacy for coverage terms and target funds.
For some credit union industry stakeholders, deposit insurance policy is an acutely sensitive topic. Elevated, or unlimited, levels of deposit insurance coverage is a competitive advantage for some credit unions against Canadian banks. Over recent decades then B.C. credit unions have operated in regimes that offer both unlimited and limited coverage. There are advantages and disadvantages, costs and benefits of each policy and there are international best practices.
Deposit insurance policy may gain prominence due to federal credit unions and a current B.C. legislative review.
A hybrid future with federal and provincial credit unions may create four implications for deposit insurance - entity funding, policy inconsistencies, consumer confusion and deposit transition. Provincial ex-ante deposit insurance funds may retain historical premiums paid by federal credit unions, potentially creating material insurance surplus. Deposit insurance policies across Canadian jurisdictions and between entity types currently vary materially and may differ from international practices. There is a risk that consumers may not understand the difference in deposit insurance coverage offered by a federal credit union and a provincial credit union. The transition from a provincial to a federal credit union may displace a subset of deposi- tors, say those with relatively large account balances. This article does not expressly address federal credit union matters.
An active legislative review by the B.C. Ministry of Finance is considering the optimal level of deposit insurance for B.C. credit unions. FIA/CUIA submissions by the B.C. credit union system and by most, but not all, individual credit unions appear to significantly support the maintenance of the current regime of unlimited deposit insurance. Data suggests that this regime may have supported growth in membership, deposits and market share of the B.C. credit unions. Further, the regime may have contributed to the relatively strong market share by, and large average member deposits in, B.C. credit unions compared with provinces that have limited coverage. But a policy of unlimited deposit insurance is unknown outside of Western Canada, may cause moral hazard, and may be increasingly expensive to credit unions in terms of earnings, capital and compliance.
This article seeks to stimulate collaborative discussion. It may highlight history or facts that are unfamiliar. It may aid profes- sional education or support policy formulation by the Board or executive of a credit union or system entity. In this article, most analysis related to B.C. aggregates information for CUDIC and SCCU. The report is framed in the following sections-
Overview: Deposit insurance; Deposit insurance in Canada; Deposit insurance in B.C; Pros & Cons of alternate regimes Implications: Bene ts of unlimited coverage; Costs of unlimited coverage; Regulation & Deposit insurer Conclusions: Policy options; B.C. credit union system view
References, About the author, Disclaimer
As a discussion document, it consciously does not provide a policy recommendation. But it does strive to gather objective data; present relevant analysis; consider advantages, disadvantages, and implications; and frame three discrete policy options.
Maintain current policy of unlimited deposit insurance
Re-introduce policy of limited deposit insurance
Seek policy alignment of deposit insurance across Canadian jurisdictions
DEPOSIT INSURANCE OVERVIEW
Many jurisdictions or legislatures require that their deposit taking institutions maintain deposit insurance. Most North American deposit insurers were established decades ago.
First deposit insurance entity - Reportedly by Czechoslovakia
US banks - US established the Federal Deposit Insurance Corporation (FDIC) following the 1933 banking crisis
Canadian banks - Canada established the Canada Deposit Insurance Corporation (CDIC) in 1967
US credit unions - US National Credit Union Share Insurance Fund (NCUSIF), administered by the National Credit Union Administration (NCUA), was created by Congress in 1970
BC credit unions - Credit Union Deposit Insurance Corporation of British Columbia (CUDIC) was formed in 1958
BC credit unions - Stabilization Central Credit Union (SCCU) was created by legislation in 1989
EU - Member state requirements introduced in 1994 with policies subsequently increased and harmonized
Deposit insurance entities actively manage risk and monitor deposits. Assumptions on risk drive actuarial models that typically frame target fund size. is mitigated through of legislative requirements; issuance of regulatory guidelines; maintenance of prudential supervision and oversight of market conduct. Each function may be operationally executed by the deposit insurer staff or outsourced to a government entity or other entity. Insurers may penalize financial institutions that are perceived as high risk. Assessed premiums may be elevated if a deposit taking institution is subject to active regulatory intervention; reports poor or deteriorating financial performance; or has other factors that suggest elevated depositor risk.
The terms of deposit coverage are determined by legislation and can change over time. Currently, coverage for Canadian institutions varies from C$100,000 to unlimited. European Union members coverage of EUR 100,000. U.K. offers coverage of GBP 85,000. Terms in jurisdictions, including the UK, are significantly more restrictive than in Canada - a UK depositor is insured for GBP 85,000 per financial institution where a Canadian depositor is insured per account type (e.g. C$300,000 across TFSA, RSP and taxable accounts in a jurisdiction with C$100,000 coverage) per financial institution. During the 2008 financial markets challenges the then B.C. government replaced limited with unlimited coverage for member deposits at B.C. credit unions. In 2012 then U.S. authorities consciously let lapse legislation that provided temporary unlimited insurance at FDIC, a major U.S. deposit insurer, thereby resuming coverage up to US$250,000.
Canadian provincial credit unions are mandated members of a provincial deposit insurance fund while banks and federal credit unions are mandated members of Canadian Deposit Insurance Corporation (CDIC). All Canadian deposit insurers are funded on an ex-ante basis. Under this approach then each financial institution member makes regular financial contributions to build a collective fund that is intended to settle the costs of any future claims.
Multiple types of Canadian entities provide deposit insurance. Depending on the applicable legislation then the provider may be a provincial government ministry, a provincial crown corporation, and/or a credit union system organization. Related stakeholder representation, nominations authority and regulatory independence vary.
Critics highlight moral hazard concerns, that escalate commensurately with the level of insurance. Depositors, reliant on full reimbursement, may place minimal effort to select or to monitor their financial institution. Deposit taking institutions may be incentivized to undertake elevated risks, underprice risk, and/or insufficiently adopt sound risk management practices.
DEPOSIT INSURANCE IN CANADIAN PROVINCIAL CREDIT UNIONS
Deposit insurance coverage terms vary materially. The monetary value, depositor profile and account type that are eligible under deposit insurance regimes are markedly different across different provincial credit union systems; between provincial credit unions and federal credit unions; and between provincial credit unions and banks.
Western Canadian provincial governments all currently have legislated regimes that provide unlimited deposit insurance to their provincial credit unions. Depositors in other provincial credit unions are subject to maximum coverage between C$100,000 and C$250,000. Federal credit unions and banks are subject to C$100,000 deposit insurance.
Deposit insurance is impacted by federal charter. Should it secure a federal charter then member deposits of Coast Capital Savings Credit Union would be insured to C$100,000. Coast Capital Savings Credit Union, in its member documentation related to federal credit union resolution, included informative tables that outlined the deposit insurance regimes of CUDIC (provincial credit union) and CDIC (banks and federal credit unions).
Where deposit insurance is capped, limits are usually by account type and may not apply to registered accounts. Depositors may have the ability to arrange their banking affairs across more than account type or deposit holder to achieve higher levels of aggregate deposit insurance.
Deposit insurance amounts typically apply per account type per person per financial institution. A couple residing in a jurisdiction with maximum C$100,000 deposit insurance may be able to access in excess of $500,000 deposit insurance coverage between RSP, TFSA and taxable accounts for each person - or multiple times that level if deposits are spread across multiple financial institutions. Some international jurisdictions have more restrictive policies that aggregate accounts per institution.
Some may question the strategic need for, and perhaps operational of, elevated or unlimited deposit insurance policy for any credit union. Historically, credit unions may have courted the operational banking needs of small community members rather than high net worth or institutional depositors.
All depositors do not appear to require unlimited insurance. At December 2015, 30% of member deposits in Ontario provincial credit unions were uninsured, being in excess of the maximum amount or otherwise ineligible under DICO terms. At March 2016, 73% of deposits with CDIC members were uninsured.
DEPOSIT INSURANCE IN BRITISH COLUMBIA CREDIT UNIONS
B.C. credit unions are required by the Financial Institutions Act to be members of Credit Union Deposit Insurance Corporation (CUDIC) and of Stabilization Central Credit Union (SCCU).
CUDIC is a provincial crown corporation that is administered by the Financial Institutions Commission (FICOM), an agency of the BC provincial government.
SCCU is a cooperative organization that is owned by BC credit unions and managed by a small dedicated team.
Each related entity is wholly governed by nominees of either the government or the credit union system. Currently, the Superintendent and Commission of FICOM are also the CEO and Board of CUDIC, with Commission/Board members appointed by the Lieutenant Governor in Council. While the Board of SCCU is comprised of executives and directors of credit unions, largely appointed by credit union peer groups.
CUDIC and SCCU collectively manage almost C$0.6 billion of investment assets. SCCU currently provides CUDIC with coverage of the first C$30 million of depositor losses. In the event of a deposit claim larger than available CUDIC assets, the B.C. government may - but is not required to - provide incremental funding to CUDIC to settle depositor losses.
The evolution of ex-ante investment assets, roles & responsibilities, and stakeholder relationships between SCCU and CUDIC /FICOM, while of potentially significant historical impact and future opportunity, are beyond the scope of this article.
A system-led deposit insurance fund was introduced in B.C. in 1968 following credit union losses that required financial support from the B.C. credit union system to permit the refund of member deposits. Unlimited coverage, insured by the credit union system, was effective from 1968 to 1988. In 1988 then B.C. government formally legislated an explicit deposit insurance guarantee but imposes a limited regime that was capped at C$100,000. This compared to C$60,000 coverage at Canadian banks. Limited coverage applied until 2008, at which time the BC provincial government replaced the then limited regime with an unlimited regime, partly in response to the then turbulence in financial markets and economic conditions. To the knowledge of the author then, in 2008, the current unlimited deposit insurance regime in B.C. was proposed by the provincial government rather than requested by the credit union system.
Deposit insurance premiums represent a material cost to B.C. credit unions. CUDIC 2016 assessments represented approximately 18% of the net income reported by the B.C. credit union system (C$46.7m and C$260.9 million respectively).
The extent of credit union deposits that would become uninsured the B.C. government to re-introduce a regime of limited deposit insurance is not publicly quantified. But insight is available from Coast Capital Savings Credit Union. In documentation issued to members prior to its federal credit union resolution then Coast Capital Savings disclosed that “As of July 2016, fewer than 4% of Coast Capital Savings’ personal members require deposit insurance beyond $100,000. This means the eligible deposits of 96% of our personal members fall within CDIC’s coverage limits today.” The dollar value of member deposits in excess of C$100,000 may represent a materially larger amount than 4% of total member deposits given that, by definition, noted personal members have relatively large deposits and there may also be ineligible deposits from non-personal members. Further insight may be available from the significant level of non-insured deposits in Ontario credit unions and in Canadian banks, each of which currently has coverage capped at C$100,000.
“A credit union opting to continue into the federal jurisdiction would not be able to bring their funds that were provided to CUDIC to the federal jurisdiction. Those funds would be retained by CUDIC.”
PROS & CONS OF UNLIMITED AND LIMITED DEPOSIT INSURANCE
A significant number of policy and economic papers have been written on deposit insurance regimes and related topics. This may reflect the increased adoption, over recent decades, of deposit insurance regimes internationally. Most, if not all, papers that consider alternative regimes do so between those with limited deposit insurance versus no insurance. The absence of policy critique in regards unlimited coverage may reflect the exceptional rarity of such policies outside of Western Canada.
Deposit insurance can bolster depositor confidence, especially in times of uncertain market or economic conditions. Former US Treasury Secretary Tim Geithner, in his thoughtful book 'Stress Test', may frame such a policy as ‘putting money in the window’ to visibly demonstrate sufficient liquidity and to prevent bank runs - typically on a short-term basis. It may also represent a legislated competitive advantage, to encourage depositors to place savings at institutions with favorable insurance regimes. Regime competition can distort the profile of depositors and borrowers, and/or create treasury dependence on liquidity from non-consumer and/or out-of-market depositors.
Critics of deposit insurance typically frame two conceptual concerns - moral hazard and principal/agent gap. Each of these concerns applies in a limited coverage regime and is likely significantly augmented in a regime with unlimited coverage.
Moral hazard refers to the incentive for insured financial institutions to engage in riskier behavior than would otherwise be feasible. Depositors in insured institutions may conduct limited selection or ongoing monitoring. Executives in insured institutions may set an appetite, risk in products and/or tolerate poor risk management practices. In aggregate then this may cause excessive risk taking, economic resource misallocation, bank failures and/or higher remedial costs. Losses will be absorbed by the institution before deposit regulators may mitigate moral hazard risks through higher capital adequacy requirements; greater prudential supervision intensity; and/or rigorous intervention penalties or processes.
Principal/agent gap refers to potential disconnects between the incentives of the agent (regulator or elected official) and the interests of the principal (taxpayer). The FDIC notes that agents may “ignore the problems of troubled institutions and delay addressing them in order to cover up past mistakes; wait for hoped-for-improvements in the economy; avoid trouble ‘on their watch’ or serve some other purposes of self-interest”. the principal lacks the information or power to effectively monitor the agent. Challenges may delay remedial action and/or institution closure, ultimately increase the cost of a resolution.
This concludes the first article of a two-part series. The second part will present significant objective evidence and supporting commentary to explore related and regulatory implications; and will frame three discrete policy options. A list of sources and references will be appended to the final article in this series.
DISCLAIMER & COPYRIGHT
This article reflects the personal comments of the author, Ross McDonald. This article does not represent the views of any financial cooperative, corporate organization, regulatory body or government ministry. Comments are wholly based on information that is in the public domain.
Although the author has made every effort to ensure that the information in this article was correct at press time, the author does not assume and hereby disclaim any liability to any party for any loss, damage, or disruption caused by errors or omissions, whether such errors or omissions result from negligence, accident, or any other cause.
All rights reserved.
Federal credit union value propositions - Beyond ice cream & sprinkles
Ice cream with sprinkles. Provincial credit unions may be framed thus by strategy academics. Some aficionados may celebrate mouthwatering flavours and ingredient providence. But many a face-smeared kid may insist that ice cream is just ice cream, and that the real magic is in choosing sprinkles. Perhaps ice cream and sprinkles represent the commonalities and variations respectively in terms of value propositions across Canadian credit unions.
Ice cream with sprinkles. Provincial credit unions may be framed thus by strategy academics.
Some aficionados may celebrate mouthwatering flavours and ingredient providence. But many a face-smeared kid may insist that ice cream is just ice cream, and that the real magic is in choosing sprinkles. Perhaps ice cream and sprinkles represent the commonalities and variations respectively in terms of value propositions across Canadian credit unions.
Compared with other industries then credit unions may have high environmental complexity but low strategic diversity. Many provincial credit unions have significant similarities in their products and services, target market profile, business/operational model and/or organization values. Credit unions are bound by cooperative principles; by member-driven ownership and governance representation; by capital structures and liquidity model; by significant shared infrastructure and product development; and by joint ventures or credit union service organizations.
Historical and current commonalities have allowed Canadian credit unions to thrive. The membership, assets and community impact of Canadian credit unions have steadily expanded over many years. Credit unions provide members with financial enablement, employees with career opportunities and communities with purposeful impact. The commonalities have likely accelerated product innovation, funded technological investment, simplified treasury operations and connected best practices. All good.
Provincial credit unions strategic variations include their corporate identity or branding; product and service priorities; market mix; and theme of community impact. These may be driven by factors including local economic footprint; membership priorities; executive ambition; technological adoption; organization size and provincial regulations. A small minority of provincial credit unions strives for differentiation through divisional structures, federated model or perhaps bank subsidiaries.
FEDERAL CREDIT UNIONS
Make no mistake, federal credit unions are coming. UNI Financial Cooperative Credit Union (C$3.5 billion assets, 155,000 members) became federal in July 2016. Coast Capital Savings Credit Union (C$15 billion assets, 543,000 members) has successfully completed multiple important milestones on the pathway to a possible federal charter. Innovation Credit Union (C$2.3 billion assets, 49,000 members) has announced an exploratory strategic review. More will likely follow.
Federal credit unions need not change strategy. They could largely extend their legacy approach federally. Cooperative principles still apply. They may still leverage centrals infrastructure, common products and shared services. But the economic ‘switching costs’ to secure a federal charter are substantial given the prolonged and intensive time required by executives, Board and membership. To justify such efforts then the strategic intent may be commensurately bold.
STRATEGY & MARKETING
Strategy professionals may deconstruct value proposition into What (product/services), Who (target market) and How (business/operational model). Some may add also add Why (benefits and values) though credit unions are philosophically bound by cooperative principles. It is quite common for clearly defined value propositions to have one core fundamental characteristic that is accompanied by waterfall implications. For example, the founding belief of Southwest Airlines was low-cost travel ('What') and this drove strategic choices for aircraft layout/routes/operations ('How') and for budget-conscious customers ('Who').
Marketing professionals may offer two relevant observations. First, the extent of market segmentation is partly driven by total market size. As a market increases in size, say from provincial to national, then more segments may become statistically significant. Per the Canadian Credit Union Association then Canadian credit unions (excluding Quebec) reported aggregate assets of C$203 billion at 31 December 2016. Were Innovation Credit Union to secure a federal charter then its total available market, not necessarily its target market, would increase almost 10-fold from the C$22 billion aggregate assets of the SK provincial system. Second, a target market by definition requires conscious rejection of a significant component of an available total market. An organization must sometimes say ‘no’ to potential customers and their business. Unless a consumer of BlueShore Financial (C$3.5 billion assets, 39,000 members) has a credit score above a pre-determined rate then their membership application may be denied.
THE 'DESSERT TROLLEY' OF STRATEGIC OPTIONS
A federal credit union may glance over the presented ice cream and eye the beckoning dessert trolley. Gateau, fresh fruit, cheese plate, chocolate tart and perhaps a digestif. Still dessert, and ice cream remains an option, but variety is relatively abundant. Perhaps accessing the trolley was the motivation behind the grueling work?
Federal credit unions face multiple approaches to differentiation. One is target market. A niche market within a single province may lack viable scale but framed nationally may be attractive. Such a niche market could discard local proximity in favour of a geographic characteristic or demographic profile. Market-driven organizations typically proactively frame their products/services and operational model to optimally reflect the needs and preferences of their chosen target market. Perhaps an organizational intent of best-in-breed rather than jack-of-all-trades.
For illustrative purposes, the above table frames three discrete market-driven value propositions. There may be a significant number of incremental niches. Each illustrated target market is defined and the resultant implications on products/services and operational priorities considered. The financial circumstances, service needs and preferred banking experience of millenials, retirees and remote communities are markedly different both from each other and from cosmopolitan members. But striving for differentiated excellence requires conscious awareness of negative choices - what potential members not to target; what products/services not to offer; and what operational choices to avoid. This can be difficult for organizations.
Market-driven value propositions may seem disorientating, perhaps foolish, to some credit union veterans. Relatively few provincial credit unions have historically targeted their membership their market beyond the realities of the local communities. But there are numerous banks, insurance companies, wealth management firms and other financial institutions that expressly target millenials, retirees or other demographic segments. Indeed they often thrive within their niche. ING Direct / Tangerine, a branchless bank with C$30 billion of deposits, was acquired by Scotiabank for C$3.1 billion in 2012.
PROS, CONS & IMPLICATIONS
Best-in-breed value propositions may elevated service offerings and attract new members to credit unions. Mergers between like-minded and/or complimentary cross-province credit unions may provide incremental benefits relative to traditional transactions based on local proximity. Ultimately larger credit unions may better navigate the increasing complexity of elevated member expectations, technology investment, regulatory requirements and perhaps attraction and retainment of executive or specialist talent.
All-serving provincial credit unions may neatly balance financial needs between market segments, say between retiree savers and millenial borrowers. Best-in-breed strategic specialization requires larger credit unions, and bigger is not always better. Larger federal credit unions could lose detachment from local communities. Best-in-breed credit unions inherently exclude some potential members, services and/or channels. Any strategic realignment may require a moderate pivot and/or a short-term disconnect.
Federal credit union impact is likely a matter of when-not-if. A federal charter will attract some provincial credit unions. The lure may be acute for credit unions with relatively high growth; in provinces in which the system membership is large relative to the population; and/or in systems with relatively strong provincial competition between credit unions. Over time then the impact of federal credit unions on aggregate membership and provincial systems will become clearer. Should one or more federal credit unions elect to progress a strategy of significant differentiation then this may accelerate any system changes.
Amongst a friendly peer group then a consciously choice to be different requires resolve. But it may only a matter of time until someone reaches longingly for the dessert trolley. I wonder what they'll pick? For the rest then ice cream and sprinkles seem unlikely to become unpopular anytime soon.
DISCLAIMER & COPYRIGHT
This article reflects the personal comments of the author, Ross McDonald. This article does not represent the views of any financial cooperative, corporate organization, regulatory body or government ministry. Comments are wholly based on information that is in the public domain.
Although the author has made every effort to ensure that the information in this article was correct at press time, the author does not assume and hereby disclaim any liability to any party for any loss, damage, or disruption caused by errors or omissions, whether such errors or omissions result from negligence, accident, or any other cause.
All rights reserved.
Coast Capital Savings - Strategy: 'Good Morning Canada!'
In the movie ‘Good Morning Vietman!’ then Robin Williams encouraged troops and energized betterment. Coast Capital Savings Credit Union CEO, Don Coulter, may have executed a similar feat. Though the recent member approval of its federal credit union strategy then Coast Capital Savings has arguably broadcasted ‘Good Morning Canada!’ to the national financial services industry. It seems that industry is listening to the broadcast. A battle may loom, even if the troops wear business attire rather than army uniform. To the victor goes the right to serve members, a group that may be the primary beneficiaries of forthcoming phase of industry evolution.
In the movie ‘Good Morning Vietman!’ then Robin Williams encouraged troops and energized betterment. Coast Capital Savings Credit Union CEO, Don Coulter, may have executed a similar feat. Though the recent member approval of its federal credit union strategy then Coast Capital Savings has arguably broadcasted ‘Good Morning Canada!’ to the national financial services industry. It seems that industry is listening to the broadcast. A battle may loom, even if the troops wear business attire rather than army uniform. To the victor goes the right to serve members, a group that may be the primary beneficiaries of forthcoming phase of industry evolution.
INTRODUCTION
In October 2016, the author published a Linkedin article that considered the B.C. system implications - of a potential federal Coast Capital Savings - with the lens of centrals, treasury and regulation. Aside from unexpectedly high volume of interest then it seemed notable that over half of readers, mostly executive and board persons, were located outside of B.C. This followup article - published after member approval of the special resolution - takes a national view from a lens of strategy, growth and implications.
CREDIT UNION INDUSTRY: PROVINCIAL STRUCTURE
Canadian credit unions are provincial creatures. Their organizations were born from provincial legislation. Their retail branches and member marketing are limited to a single province. Regulation, prudential supervision and deposit insurance are provided by entities that report to a provincial government.
Credit unions are friendly local organizations. Their members, and Board members, reside in the community local to retail branches. Their cultures are inherently cooperative. They are proactively engaged with, and often provide financial contribution to, local community priorities.
Credit unions face two national-level matters. Proactive choice for collaborative shared services, such as payments, across financial cooperatives. Reactive competition, in terms of products and services, from national banks and selected service providers.
Or so it was.
Federal credit unions could change industry accepted norms. One or more large federal credit unions may, in time, transform the industry altogether. The next generation of MBA students may review forthcoming developments of the Canadian credit union industry. They may identify a ‘tipping point’ or ‘pressure for change’ event by an aspiring organization with ‘strategic intent’. But a 2004 London Business School concept and a 1979 Harvard Business School framework, both in regards strategy, may provide current insight.
COSTAS MARKIDES (LBS): STRATEGY & COMPETITIVE TACTICS
Costas Markides is a prominent professor of strategic management at London Business School. Indeed my professor when studying at LBS - thanks again Costas. In 2004 then Costas Markides published a book ‘Fast Second: How Smart Companies Bypass Radical Innovation to Enter and Dominate New Markets’. The book presents a view that first-mover-advantage can sometimes be overrated as it typically takes extensive time, energy and expense to trailblaze a new value proposition. There may be inherent need for new legislation or regulation; technology development; customer education; value-chain assembly or otherwise. A first-mover strategy may undoubtedly secure strong competitive positioning and/or abnormal economic returns but it can be an exhausting experience. Second-mover can be a strategy that is faster, cheaper and easier to execute as the trail has already been broken. Such an organization may benefit significantly from various learnings of, and of any industry or market infrastructure that was devised by, the first-mover.
“Second-mover can be a strategy that is faster, cheaper and easier to execute as the trail has already been broken.”
COAST CAPITAL SAVINGS: SECOND-MOVER ADVANTAGE
In some regards the Coast Capital Savings is a ‘second-mover’. In July 2016 then Caisse populaire acadienne ltée (“UNI Financial Cooperative”) became the first federal credit union. UNI Financial Cooperative is a credit union, headquartered in New Brunswick, that has C$3.5 billion assets; 155,000 members; and 1,000 employees. To achieve its federal charter then UNI Financial Cooperative required approval from provincial and federal authorities. The approval process took 18 months. Coast Capital Savings may reasonably benefit from the now familiarity of OSFI and the federal Ministry of Finance with federal credit union matters. But Coast Capital Savings will still be a ‘first’ for both provincial BC authorities and for Central 1 Credit Union. Coast Capital Savings is also significantly larger in size than UNI Financial Cooperative and its process may raise incremental issues. But by being the second rather than first aspiring federal credit union then Coast Capital Savings could be ‘fast second’.
Coast Capital Savings is unlikely to be the last. For example, Innovation Credit Union recently announced to its members that it was “thrilled to announce the commencement of an initiative to pursue becoming a federally- regulated credit union by 2020.” With each federal charter then the trail may become more trodden and easier to follow.
MICHAEL PORTER (HBS): STRATEGY & INDUSTRY STRUCTURE
Michael Porter is a legendary professor of strategic management at Harvard Business School. Over decades then his thought leadership has likely influenced many corporate executives and educated countless aspiring business professionals. In 1979 then Michael Porter wrote the landmark research paper ‘How Competitive Forces Shape Strategy’ that considers the sources and strengths of power within an industry. Many an MBA student has been taught the ‘Five Forces’ model of rivals; suppliers; customers; substitutes and new entrants. The strength of each force can vary significantly by specific circumstance.
Credit unions have faced industry threats from rivals and substitutes. While cooperative in nature then competition from rival provincial credit unions is unavoidable and likely increasing. For example, industry executives recently described to me the credit union market in Winnipeg as ‘fiercely competitive’. For example then residents of Kelowna, BC, now have access to four credit unions - Coast Capital Savings and Prospera alongside incumbents First West and Interior Savings. Michael Porter notes that “Rivalry among existing competitors takes the familiar form of jockeying for position - using tactics like price competition, product introduction, and advertising slugfests”. National banks represent a substitute value proposition to provincial credit unions.
“New entrants to an industry bring new capacity, the desire to gain market share, and often substantial resources.”
COAST CAPITAL SAVINGS: STRATEGIC NEW ENTRANT
Coast Capital Savings may be regarded as a ‘new entrant’. Few, if any, non-BC credit unions may have historically considered Coast Capital Savings as a competitor. And yet, subject to regulatory approvals, Coast Capital Savings intends to launch a digital-first product offering outside of B.C. in 2018.
This new competitive threat may be disruptive to provincial credit unions. Michael Porter notes that “new entrants to an industry bring new capacity, the desire to gain market share, and often substantial resources.” Just so. Coast Capital Savings has approximately C$14 billion assets and over half a million members. This scale enables a member service offering and organizational cost efficiency that may, arguably should, trigger a meaningful executive/Board threat assessment and inclusion within ERM reporting.
But let’s be specific. According to a 2016 report by nofeebanking.ca then 14 of 42 BC credit unions offer no fee chequing accounts to their members. Coast Capital Savings related product is the ‘Free Chequing, Free Debit, and More Account’ and includes, at no cost, selected deposits and withdrawals online and in-branch. Many credit unions across Canada may rely on revenues from monthly account fees, of perhaps C$10 per member chequing account. These revenues help to fund fixed costs, such as a retail branch network and corporate staff. But a national digital-first strategy of Coast Capital Savings may materially leverage its prior infrastructure investments to effectively operate on a marginal cost basis, perhaps with modest French language or province specific needs. And Coast Capital Savings could choose to cherry-pick marketing to geographic areas or market segments of particular competitive advantage or member appeal.
So Coast Capital Savings may enjoy some benefits of first-mover (scale execution) and of second-mover (charter approval) with its national digital-first ambitions. Corporate strategy and marketing enthusiasts may be forgiven for drooling.
IMPLICATIONS: CREDIT UNIONS & MEMBERSHIP
One or more federal credit unions will, in time, impact the Canadian financial services industry. My instinctive guess - perhaps entirely inaccurate - suggests that there may be one key winner and one key loser.
The winner, I suspect, may be membership. A new entrant to a provincial credit union system may bring fresh products or services; new or elevated channels; and/or may stimulate betterment in innovation, operations and other practices. Member choice and market competition can be powerful market forces. Over time then members may enjoy improved products, enhanced service access and/or better pricing.
The loser, I suspect, may be any currently struggling provincial credit union. In the short term then any new federal entrant may increase total credit union membership through incremental marketing programs. But, in time, it may also represent potentially life-threatening competition to any uneconomically small or uncompetitively operated credit unions. In most industries then it is difficult to compete, on a cost-basis, with a rival of materially larger scale. Differentiated excellence may be key. This could further strengthen credit union relationships with its local community. Or it could yield focussed services and expertise in a specific target market, say local agriculture. Or in wallet-share rather than market-share focus. Or increased collaboration, perhaps merger, with local peers.
Federal credit unions may impact banks, in the medium term. In Canada then the largest credit union is a tiny fraction the assets size of the smallest major bank. This gap may narrow in time.
“In most industries then it is difficult to compete, on a cost-basis, with a rival of materially larger scale. Differentiated excellence may be key.”
Millenials may be most temptable to join an out-of-province federal credit union. A Filene Research Institute publication on millenials highlights a demographic challenge that faces US credit unions. One-third of Americans are members of a credit union. But membership is dominated by older generations while only 9% of US millenials are credit union members. For credit unions then millenials may represent a challenging bunch. They demand more service for lower cost; prefer digital, not retail branch, service channels; may be brand-attracted; relish social media marketing; and likely have lesser relationship tenure with a provincial credit union.
Any material loss of relatively young members may present longer term demographic challenges for provincial credit unions. But this may be the prime target market of Coast Capital Savings digital-first national strategy.
As in the movie-represented streets of Vietnam then the offices of Coast Capital Savings may hear booming renditions of ‘I feel good’ or ‘I get around’ by James Brown and the Beach Boys respectively. But in credit union boardrooms across Canada then the broadcast may sound more like ‘Nowhere to Run’.
REFERENCES
Author Reference
Linkedin, Ross McDonald, ‘Coast Capital Savings: Federal credit union implications for the B.C. system’ - https://www.linkedin.com/pulse/coast-capital-savings-federal-credit-union-bc-system-ross-mcdonald
Academic References
Harvard Business School, ‘How Competitive Forces Shape Strategy’ - https://hbr.org/1979/03/how-competitive-forces-shape-strategy
Wiley ‘Fast Second: How Smart Companies Bypass Radical Innovation to Enter and Dominate New Markets’ - https://hbr.org/2008/02/fast-second - http://ca.wiley.com/WileyCDA/WileyTitle/productCd-0787971545.html
Harvard Business School,’Strategic Intent’ - https://hbr.org/2005/07/strategic-intent
Credit Union References
Coast Capital Savings Credit Union - https://www.coastcapitalsavings.com/DayToDayBanking/ChequingAccounts/
Innovation Credit Union, Press release - https://www.innovationcu.ca/SharedContent/documents/Vision2020/MemberAnnouncementLetter.pdf
Filene Research Institute, ‘What Millennials Want: The Future of Millennials in the Credit Union System’ - https://filene.org/assets/pdf-reports/368_Youngest_Millennials.pdf
No Fee Banking - http://www.nofeebanking.ca/forum/content.php?190-Credit-Unions-in-British-Columbia-No-Fee-Account-Information-and-More
Other References
Internet Movie Database, ‘Good Morning Vietnam (1987)’ - http://www.imdb.com/title/tt0093105/soundtrack
Malcolm Gladwell, ‘The Tipping Point’ - http://gladwell.com/the-tipping-point/
DISCLAIMER & COPYRIGHT
This article reflects the personal comments of the author, Ross McDonald. This article does not represent the views of any financial cooperative, corporate organization, regulatory body or government ministry. Comments are wholly based on information that is in the public domain.
Although the author has made every effort to ensure that the information in this article was correct at press time, the author does not assume and hereby disclaim any liability to any party for any loss, damage, or disruption caused by errors or omissions, whether such errors or omissions result from negligence, accident, or any other cause.
All rights reserved.