Writing about the future is easy. Rarely do readers look back when events have unfolded. Moreover such forecasts often reflect, not insight or wisdom, but rather one’s own efforts to protect vested interests.
However there are some reference points which can help us think about what a credit union might do going forward into a possible disrupted regulatory future.
Today I will review what Project 2025 says about federal regulation. I could find no direct reference to credit unions although I did not review all 900 pages.
Published in 2023, President-elect Trump has denied association with the ideas presented in the document. More than 100 conservative organizations were involved in its creation. I found the brief section I cite below had over four pages of extensive reference notes.
IMPROVED FINANCIAL REGULATION
From page 705: One of the priorities of the incoming Administration should be to restructure the outdated and cumbersome financial regulatory system in order to promote financial innovation, improve regulator efficiency, reduce regulatory costs, close regulatory gaps, eliminate regulatory arbitrage, provide clear statutory authority, consolidate regulatory agencies or reduce the size of government, and increase transparency.
Merging Functions. The new Administration should establish a more streamlined bank and supervision by supporting legislation to merge the Office of the Comptroller of the Currency, the Federal Deposit Insurance Corporation, the National Credit Union Administration, and the Federal Reserve’s non-monetary supervisory and regulatory functions.
U.S. banking law remains stuck in the 1930s regarding which functions financial companies should perform. It was never a good idea either to restrict banks to taking deposits and making loans or to prevent investment banks from taking deposits. Doing so makes markets less stable. All financial intermediaries function by pooling the financial resources of those who want to save and funneling them to others that are willing and able to pay for additional funds. This underlying principle should guide U.S. financial laws.
Policymakers should create new charters for financial firms that eliminate activity restrictions and reduce regulations in return for straightforward higher equity or risk-retention standards. Ultimately, these charters would replace government regulation with competition and market discipline, thereby lowering the risk of future financial crises and improving the ability of individuals to create wealth.
From page 706: Direct government ownership has worsened the risks that government-sponsored enterprises (GSEs) pose to the mortgage market, and stock sales and other reforms should be pursued. Treasury should take the lead in the next President’s legislative vision guided by the following principles:
- Fannie Mae and Freddie Mac (both GSEs) must he wound down in an orderly manner.
- The Common Securitization Platform57 should be privatized and broadly available.
- Barriers to private investment must be removed to pave the way for a robust private market.
- The missions of the Federal Housing Administration and the Government National Mortgage Association (“Ginnie Mae“) must he right-sized to serve a defined mission.
(End Quote)
The text also states that Congress should repeal titles of the Dodd-Frank Act that created the Financial Stability Oversight Council (FSOC), a federal government organization which identifies risks, promotes market discipline and responds to emerging threats. Project 2025 defines the FSOC as a “super-regulator tasked with identifying so-called systemically important financial institutions and singling them out for especially stringent regulation.”
A Learning Event: The S&L Dissolution
In the late 1970’s the S&L industry held the largest deposit market share in California, much larger than banking competitors. This was before deregulation. Most depository firms were limited to operating in a single state or in some cases, a single location (Illinois).
Today S&L’s no longer exist as a separate industry even though 555 savings institutions with $1.2 trillion in assets still operated at June 2024. All deposits are FDIC insured. Of the total institutions, 241 are supervised by the OCC, 276 by the FDIC and 37 by the Federal Reserve. While state and federal chartered institutions still function, the system is under federal direction.
While there are many reasons for the loss of the S&L’s as a separate, independent financial segment, the dominant factor was that many of the causes were self-inflicted. These included a loss of special purpose, rapid multistate expansion through acquisitions, and balance sheets weighed down with fixed rate mortgages in a deregulated deposit funding environment after 1981.
After the mid 1990’s, there was no separate FSLIC insurance fund, no Federal Home Loan Bank Board to oversee the industry, and the FHLB liquidity system survived by serving all real estate lenders including credit unions. In most states the mutual charter exists as an anachronism, with no new charters being issued. At the state level supervision is provided by a single banking/financial institutions department.
While external financial events did contribute to the industry’s collapse, competitors did survive and thrive, especially credit unions. At the February 1982 GAC in D.C., CUNA President Jim Williams told new NCUA Chairman Callahan there was only one topic on credit union’s minds: survival.
Together credit unions and NCUA embraced deregulation and the changes in structure and oversight the new environment would require. Hunkering down , protecting existing ways and asking for more funding to address problems was not the approach.
Whether the new administration will be as disruptive of federal regulators as indicated in campaign rhetoric, remains to be seen. The lessons from an earlier era can be helpful: remember who you are and build on what brought success to this point in time.
Many of the factors in the S&L demise were self-initiated with leadership failures. Cooperative success in navigating external changes was accomplished though enhanced collaborative efforts between credit unions and their regulators. not each trying to go their own separate ways.