Coast Capital Bank

Coast Capital Savings Credit Union has recently applied to our provincial credit union regulator (FICOM) for permission to ‘continue’ under federal jurisdiction; as a Schedule 1 bank under the Bank Act.  FICOM has recently invited public comments on this application, noting that the a transfer to be regulated federally may have ramifications for other credit unions and the general public, which the commission would consider before making any decision. It is unclear what criteria the commission may apply, but the commission did release a general outline of their approach.  (FYI “federal credit union” is a type of bank under the Bank Act.)

There has been some conflict over governance at Coast Capital in the past few years.  The site governancewatch.ca provides good information on the past struggles at Coast Capital, with some recent information added about this initiative to go federal.

Below I propose some preliminary comments as I mull over the FICOM invitation. Others are encouraged to draft your own submissions to FICOM:

First, the manner in which member-owner approval was engineered was inadequate.

1. Coast Capital members were not given full and fair information on the proposal when voting electronically in November.  The member-owners were provided the most basic information only; there was no strategic plan, business case, risk assessment, or a full discussion of trade-offs. The information provided was simply a ‘sales pitch’, it was neither balanced or complete.
2. Coast Capital members were unable to express dissent to other members or truly debate the proposal.  Two small members meetings were hosted only.  In publicly traded companies dissenters would be able to circulate counter-arguments and counter-proposals, and owners’ meetings would be held with formal debate.  School boards and town councils invite input and encourage democratic participation on major decisions. The process at Coast Capital was wholly deficient and member-owners were not given the opportunity to intelligently evaluate the proposal.
3. The prizes offered for members logging in to vote, and the voting options as presented on the online interface, may well have biased participation.  Preliminary counts were published before closing of the vote count, potentially introducing another bias.

Second, the depletion of our provincially-based financial institutions will undermine the viability of the remaining credit unions.  BC credit unions are a network of service providers which rely on each other to provide scale, resilience, and expertise:

1. The loss of a large credit union will affect liquidity pooling, clearings and payments, shared back-office functions, co-operative marketing, and the pool of human capital in the BC system.
2. Concentration risk will be heightened as Vancity goes from 25% of the system to 30%.
3. The implication and likelihood of subsequent credit union migrations may be even more threatening.  Other large urban credit unions will assess the option, or may be approached to merge with out of province credit unions.
4. While certain BC related business functions at Central1 may be maintained at a lesser scale, the remaining BC credit unions will have to consider other collaboration options, especially as Central1 expands inter-provincially.

Third, Coast Capital is a community-based asset with an intrinsic commitment to serve the Lower Mainland and Greater Victoria.  Conversion to a national entity fundamentally breaks the social contract that exists.

1. Coast Capital was formed by smaller credit unions in Victoria, Surrey and Richmond. The retained earnings (core capital) and essential value of the entity has been derived from many generations of local people and their patronage.  The core tenet of membership, and the decisions to retain earnings each year, was that the financial co-operative would be there for these communities over the long term. It was not built to chase distant customers.
2. The strategy of ‘go big’ is contrary to the general commitment to co-operation among credit unions as a means to achieve scale.  The board and management see a ‘business opportunity’ to have Coast Capital morph into a ‘bank’ to achieve scale, which will compete directly with BC credit unions.
3. One must ask who’s interests are at the heart of the proposal.  A migration to federal jurisdiction will likely provide career boosts, compensation enhancements, and some status to insiders. The potential benefits to member-owners are far less certain, but their influence will be diluted. It is member capital being put at risk.
4. Perhaps it would be better to ask management to develop a proposal to buy the business from the member-owners directly and so transfer the business to a federal bank. The 10 year transition provisions for continuing federal credit unions may make demutualization inevitable, in order to meet capital requirements.  If a management buyout was up front, the current member-owners might receive fair value for there credit union.

Fourth, conversions to federal jurisdiction will disadvantage the provincial government and leave our BC government, businesses, and consumers more reliant on the banking oligopoly supervised by the senior level of government.

1. As far back as the 1950’s WAC Bennett promoted a ‘BC Bank’ and more recently other ideas have been promoted for a ‘financial centre’.  Independently, and perhaps also organically, BC credit unions have grown and credit unions serve every corner of the province. BC credit unions are important lenders & maintain Vancouver’s only significant non-government treasury desks.
2. Credit unions offer the province a window on monetary policy as deposit-taking institutions.  Deposit-taking institutions create @90% of the money supply.
3. Credit unions offer the government a potential partner for program delivery province-wide.
4. Several assessments of the 2008 financial crisis have resulted in recommendations to break up large banking entities, to encourage diverse business models, and to otherwise nurture smaller intermediaries.  The opposite direction.
5. The Bank Act amendment and related inducements by the federal government reflect their interest in having greater ‘control’ of these deposit-taking institutions, implying that the province will have less.

Coast Capital is BC’s second largest credit union with @500,000 members and $16B in assets. Coast Capital comprises 20-25% of the BC credit union system, depending on which measures you choose. Coast Capital management and board have championed a ‘go national’ strategy for several years and three years ago the Federal government amended the Bank Act to allow for ‘Federal Credit Unions’ to be included under that act, but none has yet been continued federally.

Credit unions have existed under provincial laws only.  They arose because many consumers (/workers) demanded services that were fairer, more responsive, and attentive to local needs. Credit unions are consumer co-operatives.  They have grown to be major players in Quebec and the provinces of western Canada.  In BC credit unions have @25% of retail banking market and 1.9 million members.