Chip Filson
The White House
Washington D.C.
July 2, 1936
MEMORANDUM FOR
THE SECRETARY OF THE TREASURY
What do you think of some
publicity on Federal Credit Unions?
I understand 1,479 of them have already
been organized, with an estimated
membership of 205,000. We might do
something to push this. They are
popular.
–F.D.R.
My only question is, who brought this opportunity to FDR’s attention? That is the kind of “Washington presence” credit unions should have today!
Amit Seru, a Stanford University Professor, presented his most recent data updates on the role of shadow banks and FinTechs at the FDIC’s 19th Annual Research Conference last week.
The slides he used can be found here.
The trends show that more and more lending is originated by non-depository institutions in both the mortgage and consumer lending arenas.
Two of his slides (#10 & 11) illustrate this growing market penetration geographically by county between 2008 and 2015.
These alternative financial firms enter markets as depository firms withdraw primarily due to their lack of profitability.
Seru was especially interested in the role of FinTechs firms, which he defines as firms relying on virtual channel operations that can be completed from beginning to end without human intervention.
The FinTech advantages of faster processing, use of broader data sets for marketing and decisioning, and a superior quality online experience, are well known.
But he also suggests their success is not because of a price advantage over banks. In some cases consumers pay more for online convenience and speed.
Seru concludes that the Fintech technical advantages account for only 30-40% of the shift in market share. He asserts the most important factor (60-70%) in this ten-year market share change is the impact of regulation on banks’ ability or willingness to continue serving specific markets. This regulatory burden has increased substantially since the 2008 financial crisis primarily as a result of regulations from the Dodd-Frank legislation.
Even with a lesser regulatory burden, FinTechs are not all-powerful. He points out they are mostly dependent on the secondary market for final loan funding. Importantly, the balance sheets of depository institutions gives them more flexibility in certain products such as jumbo loans. Should the secondary markets become more selective or volatile, then the banks traditional funding advantages may reassert themselves.
For both traditional and new entrants in the consumer and small business lending markets, the key factor to long term growth and resilience is access to liquidity. Generally depositor relationships are more stable and often less expensive than wholesale and secondary market reliance. Convenience, not price, seems to be the primary reason FinTechs disrupt traditional service models. However this advantage in the digital channel is rarely permanent. An all-channel strategy is especially valuable for community institutions.
Credit union relationships based on loyalty and trust are a significant advantage versus competitors focused on transaction capture. For 110 years the cooperative model has followed a second-to-market innovation strategy that has resulted in growth and evolving business models. Cooperative design, aligning with members’ needs, would seem to be a continuing advantage regardless of where disruption may occur.
In no other sector of the “post-war” economy, has the impact of automation, robotics and AI been more important than manufacturing. This is one of the factors underlying the current GM strike. Not only are jobs being lost to automation and outsourcing, the demand for more simply-assembled electronic vehicles may further reduce the need for skilled auto workers.
Real manufacturing output has grown consistently through greater productivity while total employment in this sector peaked in the late 1970s. This long term trend (1947-2014) is shown in this graph by economics professor Alan Gin:
Employment keeps expanding, but the allocation of jobs between sectors is changing. The bureau of labor statistics publishes an annual ten-year forecast of job growth by sector. Its latest projection https://www.bls.gov/emp/ is as follows:
The implications for credit unions serving communities or SEGs are many. The fastest growing job segments tend to be lower paying as indicated by May 2018 salaries.
Two of the fastest growing sectors are driven by the response to climate change and energy production. Higher paying jobs would appear to require more college than lower paying ones. Both wholesale and retail trades show shrinking levels of employment.
The manufacturing sector is the one industry with the highest rate of projected job decline.
Credit unions have traditionally done a good job of knowing much about their members. However, as more credit unions seek ways to have a positive impact and influence the economic direction of the communities they serve, monitoring local job trends will be increasingly critical when making loans and future infrastructure investments.
In CUInsight’s Sunday jobs report, there are credit unions listing 10 to as many as 40 job openings in this weekly post. In addition to individual senior management positions, the most recent numbers ranged from a high of 23 to a low of 7 openings per credit union.
Finding and keeping employees is getting tougher. In a recent presentation by Economics Professor Alan Gin from the University of San Diego, some of the macro trends show why today’s labor market is so competitive.
All traditional measures of under or unemployment segments are the lowest levels in the past 15 years.
Secondly, the labor force participation rate is at its lowest since the 1980s. He cites four factors contributing to this structural decline:
Tactics for responding to this tight labor market are vital. Retaining and growing current staff becomes more urgent.
Other efforts include automation (how many credit unions answer the phone with a live person), moving jobs to different areas with less tight labor markets, process and productivity improvements, and outsourcing.
Whether the situation is short lived or a more permanent feature of the evolving economy, the need for new ways to find and retain the right staff will be a critical factor in many credit union’s ability to grow and to serve members well.
We’ve already seen that the risk based approach does not work. It’s obvious that neither man nor model can adequately assess a given asset’s risk under all circumstances before the fact. It doesn’t make sense to spend a lot of time trying. It does make sense to have a minimum leverage ratio but it should be the same for banks of all sizes.”
(Thomas Brown, A Loss of liquidity, not inadequate capital, is what often dooms banks. Bankstocks.com, April 22, 2014)
The leverage, net worth ratio, is the current credit union capital model. Risk based capital formulae should be tools, not a rule.
The immediate vulnerability for the credit union system at this time is the absence of the CLF-Corporate liquidity safety net. Liquidity allows fluctuations in asset values to recover rather than selling during market disruptions and taking losses that reduce capital.
On September 17, the FDIC board eliminated risk based capital (RBC) requirements for community banks with assets of less than $10 billion.
It replaced the international banking BASEL-inspired approach with a simple leverage ratio. A community bank will be considered well-capitalized under required prompt corrective action (PCA) regulations if the tier 1 leverage ratio is 9%.
Banks will not be required to report or to calculate a risk-based capital according to the FDIC’s press release.
The FDIC Chairman Jelena Williams said the new rule ensures that the regulatory framework is commensurate with the operational reality of these institutions.
“The final rule. . .supports the goals of reducing regulatory burden for as many community banks as possible. . .and will allow community banks to significantly reduce the regulatory reporting associated with capital adequacy on the call report.”
The rule was also supported by all the other banking regulators, the comptroller of the currency and the Federal Reserve.
The final RBC rule passed by the NCUA board was over 400 pages and requires all of the regulatory and reporting burdens cited by the FDIC as the reason for eliminating this requirement.
Surely the NCUA can learn from this experience! There is no better time or precedent to cancel this ineffectual, burdensome and deeply flawed approach to capital measurement. For if such a rule had been effective, it would have stayed. The FDIC’s experience shows RBC doesn’t work in practice.
The simple to understand leverage ratio, now in effect, has served credit unions well since deregulation and the imposition of PCA in 2008.
Don’t be misled by the 9% well-capitalized FDIC level versus the credit union’s 7% well-capitalized PCA standards into thinking cooperatives need to raise their capital. All of the capital reserves in credit unions are “free.” More than half of bank capital is in equity shares, whose owners are expecting a return on their investment. Free cooperative reserves do not have this performance expectation and cost.
There is no better time for NCUA board to withdraw this misguided rule. Will the board show the leadership demonstrated by the FDIC?
All credit unions would give a great sigh of relief to have this burden removed from the horizon.
While it is true that cooperatives create “common wealth” to be paid forward for use by future generations of cooperative members, the context of why this option is critical in a market economy is often overlooked.
The following statement by Mark Carney, Governor of the Bank of England, in a May 29, 2014 speech, outlines the importance of the contribution from cooperative design:
Just as any revolution eats its children, unchecked market fundamentalism can devour the social capital essential for the long term dynamism of capitalism itself. . .Prosperity requires not just investment in economic capital, but investment in social capital; that is the links, shared values, and beliefs in a society which encourages individuals not only to take responsibility for themselves and their families, but also to trust each other and work collaboratively to support each other.”
Recently the CEOs of the Business Roundtable issued a policy statement that proclaimed the purpose of the corporation is to promote “an economy that serves all Americans.” Hopefully that would embrace the vital role of cooperative credit unions.
The Chairman of the Business Roundtable is Jamie Dimon, who is also CEO and Chair of JP Morgan Chase and Co. The statement is a positive example of a vision for corporate America that transcends the single-minded pursuit of shareholder value.
But the challenge is more than an expanded purpose statement as we are reminded in the following comment:
“There is evidence of deep-seated cultural and ethical failures at many large financial institutions. Whether this is due to size and complexity, bad incentives or some other issues is difficult to judge, but it is another critical problem that needs to be addressed.”
William Dudley, President, New York Federal Reserve Bank, November 7, 2013
This observation was years before Wells Fargo’s decade long mistreatment of consumers became public.
From the 2008 Filene study: The Credit Union Brand: What is it good for?
“For years now, it seems that credit unions have placed themselves more and more in the bank brandscape, and our research supports this conclusion. What a pity that credit union members think that credit unions are just another bank. But when you look at credit unions, what is there about them that signals to consumers that they are not banks? The buildings are often designed to look exactly like a bank. Consumers conduct their financial affairs in a similar manner. Often even the advertising shouts “bank!” These signals do not go unnoticed by consumers. And, it appears that some credit union management may have felt that credit unions as financial institutions didn’t get the same respect as banks in the past; thus a natural reaction would be to try to make credit unions more like banks to attain the same status.“ (page 41)
At a time when many credit union leaders see NCUA board members announcing new regulatory agendas in virtually every speech, it is helpful to remember this counsel from a former NCUA Chairman:
“The only threat to credit unions is the bureaucratic threat to treat them for convenience sake, the same as banks and savings and loans. This is a mistake, for they are made of a different fabric. It is a fabric woven tightly by thousands of volunteers, sponsoring companies, credit union organizations and NCUA-all working together.”
Source: Chairman’s letter: NCUA 1984 Annual Report