Puerto Rico’s cooperativas—island guaranteed credit unions—have thrived despite repeated crises and poor supervision by its regulator, the territory’s oversight board said in a report last week.
“The cooperative system proved to be resilient through…disasters and played an important role in enabling the recovery process to start,” the oversight board, created by Congress to oversee the island’s recovery from bankruptcy said in a fiscal report that must be prepared for all government agencies on the island.
Puerto Rico has faced a fiscal crisis, devastating damage from hurricanes and now the coronavirus crisis. The oversight board has the responsibility of assisting the island government in restructuring its debt; it reviews legislation, budgets, and agency fiscal plans as part of that responsibility.
The island credit union system is supervised by the Corporation for the Supervision and Insurance of Cooperatives (COSSEC). That system is separate from Puerto Rico’s NCUA affiliated credit unions.
The COSSEC system has 113 credit unions, holding about $8.3 billion in shares and deposits. The cooperativas serve about a million members and are particularly important because they serve people in more rural areas of the country, where there might be few other types of financial institutions. As with mainland credit unions, the number of cooperativas has decreased during the past 20 years, while insured deposits and shares have increased, the oversight board said.
The report said the system has grown, but the regulatory regime remains poor. “The cooperative system must improve its long-term resilience by moving toward higher national standards for governance and transparent accounting,” the board said.
The board report added that the island’s government proposed an overhaul of the regulatory regime in 2017 and 2018, but that there has been “almost no progress towards achieving” the changes.
“Continued delays in addressing the problems in the system are only creating more financial risk for COSSEC and its ability to protect the depositors in the system,” the oversight board said in the report. Many cooperativas have accumulated losses that threaten their long-term solvency; some of those credit unions accumulated losses as a result of their investments in Puerto Rico bonds.
According to the report, COSSEC must be reorganized to become an effective regulator. The COSSEC board should be comprised of five members who have appropriate academic credentials. The members should not be affiliated with any financial institution regulated by COSSEC.
COSSEC must be able to evaluate the financial health of the institutions faster, the report said, adding that the agency may have to increase premiums charged to cooperativas.
The oversight board itself has been controversial; the U.S. Supreme Court recently ruled that the formation of the board is constitutional.
Several cooperativas have sued the oversight board and the Puerto Rico government, charging that they were coerced into purchasing government bonds, which eventually were worthless. That suit is pending in federal court in Puerto Rico.