Despite the proposed introduction of a legislative framework to allow federally incorporated credit unions, DBRS Ltd. says that it doesn’t foresee the imminent emergence of a national rival to the big banks.

The most recent federal budget proposed the creation of a legislative framework that would allow credit unions to incorporate federally. One of the possible consequences of this is the existing credit unions developing into serious competition for the big banks in the retail banking business.

However, with the details of the legislation yet to be finalized, DBRS says that it doesn’t expect any material near-term changes in the credit union systems in Canada. “What we are likely to see is an evolution of the system rather than a complete revolution,” it says.

The rating agency foresees a number of outstanding issues that will influence a credit union’s decision to apply for a federal charter, including:

– the possibility that such a charter may impose legal requirements that a credit union would find difficult to digest;

– the challenge of arranging for liquidity, funding and clearing services, which are currently provided by provincial credit union centrals;

– the prospect of more onerous capital and liquidity regulations, assuming that a federal credit union would be regulated by the Office of the Superintendent of Financial Institutions;

– weaker deposit protection under the Canada Deposit Insurance Corporation compared with some provinces;

– a likely restriction on selling insurance in branches;

– whether credit union members would want to drift away from their community-focused heritage; and

– the likelihood that the preferential tax treatment credit unions currently receive would come under pressure from banks.

DBRS concludes that it does not expect a federal credit union to emerge as a material national competitor in the near future, but says that the emergence of a credit union operating in more than one province is almost inevitable.

“A common long-term dream for some time within the sector has been that all provincial credit union centrals would eventually join up as one (except Quebec because Desjardins Group has a different business model). Perhaps this would lead to national credit unions, be they provincially or federally regulated,” it says.

IE