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Keeping an Eye on the Ball: Credit Unions, the Level Playing Field, and Competitive Balance

This report suggests the need for credit unions to use a “competitive balance” when advocating for policy changes that could benefit, or at least minimize the harm to, the credit union system.

Executive Summary

Financial sector policymakers should think in terms of chess clocks and golf handicaps. Instead, they all too often fall under the sway of a very powerful metaphor that winnows down the art of financial sector policymaking to the simple act of designing a “level playing field,” where everyone operates under exactly the same rules regardless of size, purpose, or structure.

As anyone working in the financial services sector can tell you, the free market is all too often not very free at all. Credit union activity is seriously constrained by rules governing, for example, money laundering and terrorist financing, member privacy, governance, interest rates and fees, branch accessibility, payment systems, and, of course, capital and liquidity requirements. This is just a top-of-mind list. We could go on. And on. And on.

What is the research about?

While the broad policy objectives behind most, if not all, of these rules are unobjectionable—who doesn’t want to stop money laundering and terrorist financing?—policymakers are all too often blinded to the effects of their policies on the competitive landscape, especially as these policies relate to credit unions, because they tend to fall into the trap of thinking strictly in terms of what Haggart calls the “evocative metaphor” of the level playing field. As Haggart notes, the “level playing field” metaphor suggests “images of a football or vii hockey game in which competitors, overseen by a neutral referee following a fixed set of rules, battle for supremacy. Success is dependent on the competitors’ innate skills, not on any favoritism built into the rules or doled out by biased officials.”

This report suggests the need for credit unions to sometimes use a “competitive balance” metaphor when advocating for policy changes that could benefit, or at least minimize the harm to, the credit union system. As opposed to the “level playing field,” the “competitive balance” metaphor forces credit unions and policymakers to focus on ends—achieving an adequate degree of competition in the financial services sector—without prejudging the means by which they are achieved. Where “level playing field” suggests the hockey rink or football field, “competitive balance” suggests handicapping in golf (or chess).

What are the credit union implications?

Drawing on explicit applications of the competitive balance metaphor in sports and in policy areas such as telecommunications and airline regulations, this report offers a principles-based road map to help credit unions make the case that regulators should think about achieving a competitive balance when designing policy at least as much as they think about leveling the playing field. Haggart identifies six principles for implementing regulations that promote competitive balance:

  • Focus on ends, not means.
  • Competing actors or sectors in an industry may face or be characterized by structural differences that impair their ability to maximize competition.
  • Rules applied uniformly may affect different sectors differently.
  • Only relevant intra-industry differences should be considered.
  • Competitive balance is only a metaphor. It is not a policy shortcut.

This report is sponsored by Credit Union Central of Canada.