Credit Union Vulnerabilities in the Financial System: An Analysis and How to Respond

The financial system within which credit unions operate to serve their communities has been radically transformed since the 2007 Great Financial Crisis (GFC), presenting a variety of challenges for the credit union business model and its contribution to socially useful finance. This is ironic, because, after the 2007 GFC, the society, governments and regulators globally have expressed a strong desire to build a socially responsible and inclusive banking system. Financial technology (FinTech) start-ups and challenger banks have been supported, even implicitly subsidised in various forms, to transition to a socially useful and democratic banking services. But credit unions, who which have a long track record in providing non-profit, essential banking services to their members, have found themselves suffering from the unintended consequences of the quantitative easing policies by central banks and the evolving global capital adequacy rules that are applied to credit unions without analytical adjustments for risk and business model characteristics. This report argues that credit unions as socially useful community-based financial institutions face threats from the dysfunctionalities in the financial system created by the combined forces of a) central bank quantitative easing policies that were launched after the 2007 financial crisis and have further expanded after the 2020 Covid-19 health crisis, b) globally evolving capital adequacy rules with a one-size-fits-all regulatory approach to risk management and ignoring capital formation and profitability dynamics at credit unions, and c) regulatory and governmental support for FinTech businesses since the 2007 crisis.