By Ray Birch
RICHMOND, Va.—Are state-chartered credit unions becoming a thing of the past in Virginia?
As CUToday.info recently reported, after being denied a desired field of membership expansion by Virginia’s State Corporation Commission in 2022, the $5.1-billion Virginia Credit Union is now looking to move to a federal charter, which would leave about 20 state-chartered CUs in the Old Dominion.
Virginia CU League President and CEO Carrie Hunt told CUToday.info the future of state-chartered credit unions in Virginia may be up in the air.
“I can't speak to all the other states, but just in Virginia it comes down to what that regulatory regime looks like,” Hunt explained. “There isn't any one factor (for the decline in state-chartered CUs in Virginia), and that's why we have the dual chartering system. There isn't any one thing…It's a whole host of factors. In Virginia again, it is just so heavily on the federal side. We'll see how long the state system under the current regime continues.”
Hunt suggested the future doesn’t seem bright for state charters unless there is a “dramatic change.”
“Under the current state of affairs, I just don't see incentives for growth in state charters in Virginia,” she said.
Virginia Credit Union, the largest state-chartered CU in Virginia, is currently overseen by the Bureau of Financial Institutions. The regulator turned back VCA’s FOM expansion—a three-year battle to add the Medical Society of Virginia to its field of membership. The Virginia Bankers Association and several community banks in the state had strongly opposed its bid to add the 10,000 members of the Medical Society.
Historical Perspective
“If you go back and look at history over the years, you see an ebb and flow between state and federal charters, depending on whether or not state charters are more favorable than federal, or vice versa,” said Hunt about the trend nationally. “I would say pretty much we are on even keel now. I do think, however, because of the times we're in, because of economic conditions, because of ongoing industry consolidation, it becomes harder and harder for that pendulum to swing back and forth.”
Getting Further Down the Road
Hunt said in any state there are times when movement towards one chartering system gets “so far down a road” it's hard to come back.
“And in Virginia, we have 20 state-chartered credit unions and the rest are federal, out of 104 credit unions,” she said. “I asked myself, are we at that point where there are things that we can do to make this the state charter more viable?”
Hunt pointed to a challenge in many states, which is that regulators need money to be effective and help credit unions adapt to quickly changing business environment.
Looking for Money
“Many states are looking for money—regulators have tight budgets, and the budgets are probably not as big as they would like,” she said. “When you have fewer and fewer institutions to draw fee income from on the state side, it becomes harder and harder to fund appropriate regulation—and then it becomes a self-fulfilling prophecy.”
VACU was required to pay $816,000 in assessment fees to the BFI this year, accounting for nearly 40% of the $2.1 million in total assessments the regulator received from credit unions statewide, the BFI reported.
The BFI received an additional $9 million from Virginia’s 48 state-chartered banks.
‘Incredibly Difficult’
All of that, Hunt stressed, is occurring at the same time the regulatory environment continues to get more complex.
“It is incredibly difficult for any entity, any state, other than maybe some of the really big states, to make sure that it's able to really compete with the federal regulator in terms of sophistication,” she said. “In looking at some of these issues now, I'm not suggesting that state regulators don't do a good job, or there's deficiencies, but as credit unions continue to grow and continue to have to become more competitive and have digital and do all these things their members need--the regulators have to be on par in that degree.”
Carrie Hunt
Other Issues at Work
There are plenty of issues at work in the state, as well, Hunt stated.
“One, of course, is field of membership. Another is the relationship with the regulator,” Hunt explained. “I would say a third is whether or not they go across state lines. It's much easier to do that with the federal charter. It also depends on the credit union’s strategic plan, and what their peers are doing. They're certainly certain powers and authorities…While in Virginia there's some broad parity, that parity is given with the consent of the state banking division. There are a lot of factors that are at play.
“I will say, though, on the flip side in Virginia, state-chartered credit unions have the ability to custody digital assets. NCUA made it clear you can do that through third parties. I'm not saying there aren't bright lights where you can innovate on the state side,” Hunt continued.
What Needs to Happen?
What needs to happen in Virginia?
“Virginia is a bit unique, because many credit unions here started out on military bases. So, there has been more of a natural synergy with the federal side,” Hunt explained. “That statement is certainly not absolute, because we have plenty of large state-chartered credit unions in Virginia that have that military history. But, we have felt a strong federal push.”
Time for Discussions
Hunt believes it would be beneficial to have “discussions” around how the state charter be can changed, and to remind credit unions of what some of the existing advantages of the state charter are. She added the league supports additional modernization of state rules, as well as giving credit unions greater flexibility in a complex era in which consumers keep demanding more from their financial institutions.
She said greater flexibility around board meeting requirements is needed, as well as significant regulatory relief on the state side overall.
“There's been the debate over the years—state or federal—which way do you go?” she said. “The pendulum has swung more towards federal now, nationwide, and I would have to look at the numbers to really see where things are, but I think it’s 60%-40% in favor of federal today.”
What Might Lie Ahead
Are more conversions to federal charters coming soon in Virginia?
“It would not surprise me,” she said. “I'm not saying that any credit union has announced that. But, because of those factors that I just listed, and because we're dealing with more and more complex issues, I think credit unions are looking to see how they can become competitive. And charter change is always an option—in one direction or the other.”