Financial Cooperatives and the Financial Crisis: The U.S. Experience Clifford Rosenthal, President/CEO National Federation of Community Development Credit Unions (U.S.) International Forum on the Social and Solidarity Economy Montreal, Canada * October 18, 2011

Todays Talk 1.Introduction: Credit Unions and Community Development Finance in the United States 2.One, Two, Three Crises! 3.Public Policy: Obama Administration Support 4.Lessons Learned and the Way Forward

Credit Unions in the U.S. The largest cooperative movement in the U.S. 7,700 credit unions (CUs) 90 million members US$900+ billion in assets

CDCUs are the progressive wing of the U.S. Credit Union Movement

CDCUs are part of Two Movements Credit Unions CDFIs CDCUs

The CDFI Movement Community Development –Credit unions –Loan funds –Venture capital funds –Banks –Microenterprise funds Different financial tools $30 billion in assets under management U.S. Treasury CDFI Fund invests in CDFIs (since 1995)

The National Federation of Community Development Credit Unions NGO serving CDCUs since 1974 –235 member credit unions in 46 states –1.6 million members –US$11 billion in assets A leader of the CDFI movement What we do: –Provide capital –Technical Assistance and management support –Regulatory advocacy –Innovative programs to serve low-income people

2. ONE, TWO, THREE CRISES! Everything is connected!

#1: The Crisis of the Mainstream Banking System Massive bailout Liquidation and Merger of Large Banks, Mortgage lenders Abusive mortgage practices Insolvency of secondary markets for housing loans – Fannie Mae, Freddie Mac Frozen credit markets : Shutdown and reduction of credit lines for businesses, consumers; Higher credit scores required

# 2: Crisis of the Economy Massive rise in unemployment Huge wave of housing foreclosures Drop in home values Federal Reserve lowers interest rates –A massive transfer of wealth –Does little to support employment

#3: Crisis of the Credit Union System

Cooperative Finance in the U.S. The cooperative pyramid: –Local credit unions, which own: –Regional wholesale (corporate) credit unions which own: –National wholesale credit union (U.S. Central) Cooperative deposit insurance –Funded by credit unions –Government-backed (full faith and credit)

Investments flow up… U.S. Central Regional Wholesale CUs Local CUs

… and into capital markets. U.S. Central Regional Wholesale CUs Local CUs Mortgage-Backed Securities

Investment losses flow down. U.S. Central Regional Wholesale CUs Local CUs Mortgage-Backed Securities

The System Crashes! 2009: Top level wholesale credit unions are bankrupt and are taken over by federal regulator (National Credit Union Administration). Estimated losses: $6 billion? $20 billion? Deposit insurance must pay, so…. All insured credit unions must pay -- now through Thousands of credit unions are unprofitable in

Effect on Credit Unions Rising loan delinquency Rising loan losses Value of portfolio decreases Regulator presses hard on credit union

Its Worst on Credit Unions that Serve the Poor! Low-income consumers hard-hit – loan defaults, delinquency rise Equity constraints; Intensified regulatory pressure on credit unions Increases in liquidations and mergers

3. OBAMA ADMINISTRATION SUPPORT It could have been worse, except for…

Greatest-Ever Federal Support for Community Development Finance! More appropriations even while other programs cut. New program initiatives: Healthy Foods Financing! $3-billion Bond Program

4. LESSONS LEARNED. THE WAY FORWARD. Silver Linings from the Crisis

Resilience! That Which Does Not Kill Us Makes Us Stronger! Most of us have survived. We loaned when banks wouldnt. Increased visibility and credibility. Becoming a recognized public policy tool. Worst losses behind us ?

The Revolution Within: Changing Minds Big/Bigger/Biggest/Too Big to Fail is not beautiful! Greed is not good! The smartest guys in the room on Wall Street are not always right. Bank on what you understand! Bank where you can see your money work!

Credit Union Growth More people join credit unions. CDCU movement grows! –Federation membership increases from 200 to 235 credit unions –Collective assets increase from $5 billion to $11 billion –Collective membership increases from 1.0 million to 1.6 million people.

Credit Union Model for a New Banking Order Not-for-profit Strict democratic control and accountability: 1 member, 1 vote. Limited executive compensation (Uncompensated board of directors drawn from membership – some countries) Focus on consumer products Often can provide better rates and access to capital than banks Direct local control over capital Regulated and insured Scalable

The Case for a Credit Union Strategy 90 million members in U.S. Broad recognition (though not enough) Despite the current crisis, credit unions will survive the stress test! –Well capitalized (on average) –Self-financed –Demonstrated increased lending in 2008 when banks were freezing credit

Some Large Questions How much can we insulate ourselves from the overall financial system? Can we/must we compete with banks to maximize financial return to our depositors or investors? What relationship to government? Can we do without guarantees and back up of deposits? Should we? How large must we be to survive? How large must we be to make an impact?

Paths for International Collaboration Work together to insure appropriate treatment of financial cooperatives and CDFIs in the emerging global regulatory structure!!! Exchange best practices and information on serving the poor, the socially excluded. –Local models of finance –Regional and national financial structures Common policies on serving immigrants? International money transmittal?

Cliff Rosenthal, President/CEO National Federation of Community Development Credit Unions 39 Broadway, 21 st Floor New York, New York / fax: