Author: Chip Filson

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The Revolution Credit Unions Are Missing

During my college days five decades ago, the primary work-study jobs were dorm crew, dining hall or checking out library books.  Students receiving financial aid were expected to work at least 10 hours per week.

As the decade of the 1960’s progressed, the college campus atmosphere inspired by the Camelot years of President Kennedy gave way to the increasingly anti-Vietnam war and civil rights movements.

New protest groups were spawned across campuses.  These included SNCC, Black Panthers, SDS and multiple other efforts to support social and political change.

In a partial final year on campus waiting for my date with Uncle Sam, I  saw a three-day occupation of University Hall and attended a student meeting where one of the participants placed a gun on the table to demonstrate his radical intentions.

Part of this campus mood was anti-business—all kinds, not just the protests against Dow Chemical or other business seen as supporters of war. Capitalist society was deemed responsible for the multiple wrongs protestors wanted to change in US public policy and social inequity.  No one saw business, or entrepreneurship worthy of academic attention or support.

Still, students would occasionally use their university setting to develop start up ideas.  One that became very popular in the ’60’s was Operation Match, a paper based computer analysis of questionnaires to provide participants names of potential dating partners. It was noteworthy, because it was an innovation that filled an ever- present social need.

Today’s Campus Environment

For the past decade there has been a revolution in both attitude and support for students in higher education who wish to create new business startups.

All of the top universities now have on-campus organized support, including courses for students and faculty who want to start new businesses.

A February 24, 2024 article lists the 14 Best University Accelerators and Incubators for 2024.

Every listing is a top academic institution including Harvard, Duke, UT Austin to USC and UC Berkley.

Here is a description of MIT’s multi-option effort which is headlined with its $100k Pitch:

  • MIT delta v: An accelerator program that runs from June-Sept for MIT students with the ability to receive up to $20,000 in equity-free milestone funding.
  • MIT NYC Startup Studio: A startup studio in NYC for MIT students and alums with the ability to receive up to $20,000 in grant funding.
  • MIT Fuse: A 3-week micro accelerator for teams with at least one MIT student as a founder.
  • The MIT Entrepreneurship Club: A community that wants to help MIT students start companies and connect them with startup jobs. Watch my interview with them.

‍Amazon web services (AWS) now sponsors a nationwide competition for university based startups:   “It’s no secret that some of the most successful startups were founded by members of the university community: from Ava Labs to Anyscale and InsightFinder, to name a few. At Amazon Web Services (AWS), we believe this is because students and faculty are often creative thinkers who are willing to take risks and collaborate with their peers—all essential qualities in a founder.”

“For current Harvard students, the Venture Incubation Program (VIP) within Harvard’s Innovation Lab fund is a 12-week program with mentoring and resources. Harvard’s Innovation Lab also hosts the President’s Innovation Challenge, where students can win funding money of up to $75,000 for a great idea. Judging criteria includes viability, empathy, rigor, ingenuity, traction, economics, and impact.”

The George Washington New Venture Competition (NVC)

Here in D.C. George Washington University sponsors an annual competition inviting students, faculty and their supporters to present business proposals and collect cash prizes and other forms of startup support and counsel.

Three finalists compete in one of four startup categories:

Consumer Goods & Services

Business Goods & Services

Social Innovation

Health Care & Life Sciences

Each finalist prepares a one-minute video of their business proposal.  There are immediate cash prizes plus additional consulting and funding support:

  • First place winners selected from these tracks will each win $10,000
  • 2nd place cash prize $7,500/track
  • 3rd place cash prize $5,000/track

Companies have one year to register as an LLC to claim the money.

To see these young entrepreneurs’ ingenuity, passion, and commitment I would encourage you to sample one or all of the 12 finalists’ sixty second  pitches which you can find here.   Several that were intriguing were Siyeh Tech’s entry to accelerate the “Speed of Peace” after conflict, In-Locater, and Goal Plus.

All of these business ideas are either conceptually complete, if not already in beta.   George Washington’s New Venture Competition is one of many in the higher education community.   This is not only an “educational” institution responding to students’ interests; in some the university benefits from partnering as startups go to scale backed with venture capital.

These competitions are not standalone events such as a campus springtime arts festival.   These programs are supported by courses, different “labs,” seminars and lectures on the art of pitch preparation and visits by university alumni speaking on their business success.

These educational innovations are helping to spark an ever-renewing stream of new business ideas with support systems intended to foster success. Students are encouraged to jump into the capitalist world and perhaps reap fame and fortune.

Simultaneously a parallel change for venturing has developed for college athletes. They can now receive income from their Name, Image and Likeness (NIL) endorsements by private businesses.  Caitlin Clark is not only Iowa’s leading basketball player, but she also appears in commercials while her games are being broadcast.  She may be the first million dollar undergrad student-athlete.

And Credit Unions?

Unlike my era in college, higher education is an active participant in American enterprise.   What does this have to do with credit unions?

Cooperatives are missing in action.  Students are not learning about personal finance from credit unions.   Credit unions which have students in their FOM’s often see them as a secondary market opportunity.

Every company, professional sport franchise, consumer product, auto manufacturer etc. must resell its brand to the next generation of users.  Or face the prospect of going out of business. Product loyalty, like religious observance,  is not easily passed down in a family in today’s society of instant access and social media.

If credit unions miss this generation of college students, will they ever catch up as they move on in their careers and families?

In the 1980’s, NCUA played a very active role supporting new student led credit unions as described in this post.  That effort is missing today.

Credit union’s absence from college and university campuses feels like a missed opportunity for attracting this generation of self-help innovators and strivers.  How do coops become part of  this new enterprise engagement by student entrepreneurs?

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Diversity in Credit Union Charter Options Matters

Many participants see credit unions as having two operating options-either a federal license or a charter issued by one of the forty-five state authorities.  Within this second group is a small subset of approximately 100 cooperatively insured credit unions in ten states who are subject to only to their home state regulations.

Traditionally the choice of charter has been an important check and balance when a regulatory system, local or national, becomes unresponsive.   Charter conversions go both ways.  In 2023 there were 12 changes with nine state charters moving to FCU’s.

Traditionally state regulators and legislatures have been perceived as more accessible and responsive versus the federal system.  Some state FOM practices are less complex and  CUSO and other authorities more flexible.  For example, the majority of bank acquisitions have been by state-chartered credit unions.

A Multifaceted Charter Choice

But reality is not this simple binary selection. Operating options are more complex than either a state or federal charter.

In a CUSO magazine article summarizing NCUA’s yearend data, the writer pointed out several  of these other operating designations.

From the  December  2023 data summary: “NCUA reported that the number of federally insured credit unions (FICU) declined to 4,604—156 fewer than there were as of the fourth quarter of 2022.  Many of those may have come from low-income designation credit unions, whose numbers dropped by 129 from 2,612 in 2022 to 2,483 in 2023.

“Meanwhile, the number of “complex” FICUs—those with total assets over $500 million—increased by 5 to 714.”

These sub-classifications matter, as they grant additional authorities or impose different regulatory requirements.  Newly chartered credit unions have different reserving timeframes in their initial years.   NCUA will periodically update the status of Minority Depository Institutions (MDI’s) which it sees as a special class of charters.

Multiple Service Designations

In January of this year Callahans, using September 2023 data, published  a summary of three other “service designations.”   In their full analysis they showed how these operating authorities, low-income (LICU), community development (CDFI), and Juntos Avanzamos. will sometimes overlap.

CREDIT UNION DESIGNATIONS
FOR U.S. CREDIT UNIONS-DATA AS OF 09.30.23

Source:  Callahan & Associates, Peer Suite

The report states 56% of credit unions have at least one designation.  Th e most common is NCUA’s LICU held by 55% of all credit unions.  The other two designations require certifications. Hence only 9.1% of credit unions are CDFIs and just 2.7% are part of the Juntos Avanzamos network.

The LICU Advantage

The LICU status is by far the most popular and important classification. The status is assigned by NCUA to a credit union in which a majority of its membership qualifies as low-income as defined in Section 701.34 of NCUA Rules and Regulations.

The potential operational advantages include accepting non-member deposits, offering secondary capital accounts,  qualifying for exceptions from the member business lending cap, and participating in NCUA’s Community Development Revolving Loan Program.

The Callahan article points out that the 2,590 LICU’s range in size “from less than $100,000 (Holy Trinity Baptist FCU, $25,899, Philadelphia, PA) to more than $20 billion (Golden 1 Credit Union, $20.5B, Sacramento, CA).  In the $1B-$10B peer group, 60% are designated as a LICU.”

Of the 432 CDFI-certified credit unions which can access grants from the CDFI Fund, 95% are also LICU’s.

The pervasiveness of the LICU designation has been a focus for groups who oppose credit unions. One critical study by the Tax Foundation expressed the following opinion of the low income designation  in a January 30, 2024 article,   After 90 Years, It’s Time to Wean Credit Unions of Taxpayer  Subsidies:

“More than half of all credit unions have been designated “low-income” institutions, a meaningless term. This designation appears to be little more than a signaling device to allow credit unions (and NCUA) to claim they are serving underserved populations without having to provide any documentation to back it up. The Congressional Federal Credit Union, which serves members of Congress and their staff members, has been a low-income credit union since 2022. Members of Congress are “hardly low-income customers.” 

Diversity of Purpose and Operating Models

These charter variations create opportunities that a one-size-fits-all regulatory structure may not accommodate. Most credit unions were founded with a unique, and generally limited, field of membership that gave them a unique “persona.”  Over time most have moved far beyond this initial market identity.

As the evolution continues, the imperative of a unique identity becomes a challenge.  Business model and/or technical innovation are necessary but often not sufficient for competitive differentiation.

While much discussion of innovation focuses on technology or new partnerships, the option to modify a credit union’s organizational definition can be overlooked. Yet these choices may be more strategic in establishing a special market profile.  These designations are more than a brand; they are a commitment to a special expertise when serving members.

Other collaborative service networks besides those above have been or are being created.  These emerging organizations sponsor specialized products, virtual distribution options, innovative member services and even specialized support organizations such as Inclusiv (a CDFI) or the Global Alliance for Banking on Values.

The critical factor is choices of organizational design and networks.  The ability to draw upon many options, not just a single charter model, can help keep credit unions aligned with their member-owners changing circumstances.

 

 

 

 

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A Valuable Source for Your Morning Economic Briefing

I recently subscribed to Reuters’ free daily Morning Bid U.S.  

It is a succinct summary of key rates, economic announcements for the day and selected articles about important events.  Today’s is the JOLTS report.

You can sign up here. It is one of 18 Reuters briefings.   The latest market updates are short and the commentaries accompanied by clear graphs.   Today also looks ahead tp Friday’s nonfarm payroll report for March.

A useful 60 second brief before reviewing the financial priorities in your credit union.

 

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Easter Transformation

Before

My Easter Dove 

by Henrietta Cordelia Ray

There came a dove, an Easter dove, 
       When morning stars grew dim;
It fluttered round my lattice bars,
       To chant a matin hymn.

It brought a lily in its beak, 
       Aglow with dewy sheen;
I caught the strain, the incense breathed, 
       And uttered praise between.

It brought a shrine of holy thoughts 
       To calm my soul that day;
I caught the meaning of the note,
       Why did it fly away?

Come peaceful dove, sweet Easter dove! 
       Above earth’s storm and strife,
Sing of the joy of Easter-tide,
       Of light and hope and life. (1910)

After

Easter’s Freedom

In a famous passage of Paradise Lost, Milton’s God acknowledges that He could have created Adam and Eve without freedom. But what would there be to praise? “Not free, what proof could they have given sincere / Of true allegiance, constant faith or love, / Where only what they needs must do appeared, / Not what they would?” (Source: Legalizing the Resurrection)

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Good Friday, Easter Springtime

In “The Prologue” to The Canterbury Tales Chaucer celebrate nature’s awakening life and, in humans, the need to once again gather together on pilgrimages.  “April” comes from the Latin aperire (to open) and apricus (sunny) as the month of the sun and growth. (Source: Jefferson Reads)

From “The Prologue” to The Canterbury Tales:

When in April the sweet showers fall

And pierce the drought of March to the root, and all

The veins are bathed in liquor of such power

As brings about the engendering of the flower,

When also Zephyrus* with his sweet breath

Exhales an air in every grove and heath

Upon the tender shoots, and the young sun

His half-course in the sign of the Ram* has run,

And the small fowl are making melody

That sleep away the night with open eye

(So nature pricks them and their heart engages)

The people long to go on pilgrimages …

Emily Dickinson’s poem of spring and the sacred:

A Light Exists in Spring

A Light exists in Spring

Not present on the Year

At any other period –

When March is scarcely here

A Color stands abroad

On Solitary Fields

That Science cannot overtake

But Human Nature feels.

It waits upon the Lawn,

It shows the furthest Tree

Upon the furthest Slope you know

It almost speaks to you.

Then as Horizons step

Or Noons report away

Without Formula of sound

It passes and we stay –

A quality of loss

Affecting our Content

As Trade had suddenly encroached

Upon a Sacrament.

Easter In Ukraine

A note from Music Mission Kiev

As Easter approaches, the joyous celebration of new life, hope, and renewal is juxtaposed against the backdrop of ongoing conflict in Ukraine. Yet despite the solemn realities of war, many still find comfort and fortitude in the timeless traditions and spiritual significance of Easter. It serves as a reminder of the enduring power of faith and the resilience of the Ukrainian people in the face of adversity. Hopefully, it will also magnify your own Easter celebration.

The Orthodox Easter is celebrated on May 5th in Ukraine this year; more than a month apart from our March 31st Gregorian calendar celebration. For Christians everywhere, Easter marks the resurrection of Jesus Christ and signifies the triumph of hope over despair, light over darkness, and life over death. It’s a time when families gather, communities of faith come together, and hearts are lifted in praise.

Hand-painted Easter eggs hold particular meaning in Christian symbolism. They represent the resurrection of Christ and are often adorned with traditional designs, each carrying their own significance. Triangles, for example, characterize the Holy Trinity.

 

(https://www.youtube.com/watch?v=98Qt6FJ-kz4&t=390s)

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Two Biblical Stories and Human Nature

Today is Maundy Thursday of Holy Week. The day of the Last Supper and Jesus’ arrest in the Garden  of Gethsemane.

Events on this and subsequent days include two intense examples of human motivation not limited to strictly spiritual contexts.  Rather the story shows how any individual might react to events in their own life.

Prophets and Honor

Every social system has ways of recognizing the successful and the benefactors of their profession. In credit unions a major event is the Herb Wegner dinner, the occasion for presenting lifetime achievement awards to honor selected leaders.

These traditions salute individual’s values and/or performance that fulfill the goals of the industry: profit, service, innovation,  growth or even longevity.   Some goals are very tangible, others more qualitative.

Those Without Honors

But whose contribution does not get honored?   The topic is raised at least twice in the New Testament:

In Mark 6:4 Jesus said to the crowd, “A prophet is not without honor except in his own country, among his own relatives, and in his own house.”

And, in Luke 4:24 (English Standard Version 2016): “Truly, I say to you, no prophet is acceptable in his hometown.”

Why this disbelief?  Does familiarity breed contempt?  Are we skeptical of any special insight let alone prophetic wisdom from persons we know well, have worked with over years. and who seemingly share the same experiences as everyone else?  Why should one peer’s views be trusted over another’s?

There is an inherent caution to see those among us, whom we know well, as having special insight versus merely expressing a different opinion.   Persons, often outsider who focus more on the message, are often more inclined to listen to these singular views.

Ordinary people can have extraordinary wisdom.  Sometimes their outspokenness make them unpopular with those in authority or leadership.   The “prophetic voice” is uncomfortable.  It challenges current shortcomings often with a passionate hope for a different future.  For those who are being challenged, this passion feels like anger.

I am not referring to the purveyors (often consultants) of innovation who promote operating improvements. The prophet’s concern is more deeply rooted in fundamental meaning and purpose.

The question for credit unions is, are there any prophetic voices challenging local or national priorities today?  Who might they be?  What is basis for their critique?

And if we can name none, what does that say about the state of our “movement”?  Has consensus trumped wisdom?

The Thirty Pieces of Silver

A second example routinely pulled from Maundy Thursday is Judas’ betrayal of Jesus in the Garden for 30 pieces of silver.

Think of how often this metaphor is used to accuse someone taking an action for monetary or other rewards seemingly to betray their personal beliefs.

Rev. Megan Brown takes a more nuanced view of Judas’ motivation:

“Judas was not a peripheral bystander, but one of the twelve, the inner circle of disciples who had accompanied Jesus in his ministry and in a shared, communal life together.

Surely Judas knew the implications of his actions. Surely, he knew that the chief priests and the elders were growing weary of this rabble rouser, Jesus, and that they wanted him gone. This exchange, and the kiss that follows later are ominous moments in the life of Jesus and his followers. They leave one wondering about Judas’ motivations. “

Judas was a believer. Some have interpreted his action as driven by deep disappoint that Jesus was not radical or bold enough in his Jerusalem journey.  The march from the Mount of Olives to the Temple should signal a rebellion against Roman rule, not a pacificist call to turn the other cheek.

Or, maybe he sensed that the multiple political forces mobilizing against this upstart rabbi from Nazareth were becoming too strong; so he decided to go to the other, more likely “winning” side.

Perhaps he was emotionally confused by the historical intensity of the Passover remembrance, the increasing crowd appeal of Jesus and the growing immanence  of a life-making choice.

What we know is that Judas deeply regrets his actions, attempts to return the silver coins and commits suicide.

Judas shows us the very human side of intense hope and belief. Is this a movement that will go in the directions I believe it should? Is there another option to this leader’s course of action? How does one express dissent if convinced current directions are not the best?

How many initial “reformers” give up their quest from exhaustion,  just to get on with life, and be comfortable with their peers?

Whether Prophetic Voice or Judas?

All movements have both personalities in their adherents.   We all might cite leaders who took courageous stands or whom we believe compromised their duty to their followers.

That is what makes leadership so critical, and often controversial.   It is also what makes public dialogue so vital.

We live in an era where there is continuing reinterpretation and debate after millennia about faith, whether Christian, Jewish, Muslim or just a value-centered life.   While many believe that truth, when proclaimed, is universal; even some would challenge that assumption.

The one common approach that all faith and other “movements” followers have ultimately taken to succeed, is to pursue these issues in community. People aligned with one another agree to listen and learn together how their differing perspectives can arrive at common purpose or priority.

The Necessity of Community

Scott Galloway has put the power of relationships in a much broader context in his precent post Mammal.ai.

“Within and across species, relationships are essential to surviving and thriving. . .

“Humans have speedballed the power of relationships. Physically we are weak, slow, and fragile, with mediocre senses and absurdly long infancies. Yet, thanks to our superpower of cooperation, we’ve dominated our environment and become the apex of apex predators. There are more birds in captivity than birds in the wild. . .

“We are wired to seek and sustain relationships and cannot survive without them. The future of the human race won’t turn on space travel or climate tech, but on our ability to attach to others. A sense that we matter, that we can call on and be called upon by others to ease burdens and celebrate joy.”

It is not coincidence that the last moments of Maundy Thursday’s Biblical events were spent in community.   Christians call it The Last Supper.

Music for Holy Week

Stabat Mater, by Antonio Vivaldi (1712). There have been many beautiful settings depicting the scene of the Mother of God standing in sorrow at the foot of the cross.

(https://www.youtube.com/watch?v=qQpWwMkGtj4&t=228s)

 

 

 

 

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An Observervation on the Difficulty of  Gaining a Credit Union Charter

Oscar Abello is the senior economic writer for Next City.  His focus is community initiatives that bring opportunities to those left behind by existing financial options.  New credit union charters are an area of special interest.

His latest story is A Long-Awaited Black-Led Credit Union Finally Gets the Green Light.  The subtitle is “after eight years of work, Arise Community Credit Union just secured Minnesota’s first state charter in over two decades.”

The announcement of this new charter’s background has been reported by the credit union press.  Abello’s story focuses on the difficulties of the process.   Here are some of his observations:

Chartering a new credit union today is like traversing a long-lost trail through the woods, one that used to be well-traveled but is now overgrown, littered with fallen trees and other obstacles no one has had to navigate in many years. Prior to 1970, there were 500 to 600 new credit unions chartered across the country every year. After a steep decline to near zero, the numbers have never recovered. Over the past 10 years, fewer than 30 new credit unions have been chartered across the country.

New Credit Union Charters

The annual number of new credit union charters issued nationwide by the federal government, as published in the annual reports from the NCUA.

According to Inclusiv, a network of credit unions that focus on community development, minority credit unions across the country are closing at the rate of one per week, making the new Arise Community Credit Union’s chartering even more urgent if that trend is to ever be reversed.  (Editor’s note: all credit unions close at a rate of more than three per week). . .

Arise hopes to fill in the gap left behind by other more conventional banks and even other credit unions. Predatory lenders have jumped into the gap left behind by the retreat of the mainstream banking system from certain communities. African Americans are twice as likely to live within 2.5 miles of a payday lending storefront, compared with all Minnesotans. . .

Chartering a new credit union is a huge lift. It’s been nearly eight years of organizing for Arise, but it’s not uncommon for aspiring credit union organizers to take multiple years between initial conversations to raising startup capital to finally getting a new charter. The Association for Black Economic Power also had to deal with a leadership transition along the way — it’s now led by Debra Hurston. The new credit union has its own CEO, Daniel Johnson, who has deep family ties and professional ties to the Northside of Minneapolis.

It would have been easier — and quicker — for Hurston if her group just brought in an existing bank or credit union as a partner organization to provide access to credit and basic financial services to the Northside.

But Hurston says in surveys, town halls and just informal conversations over the years, the Northside’s desire for its own institution has only gotten stronger.

“The mistrust in the banking community, it’s not a small thing, and it can’t be fixed overnight,” Hurston told me last year. “We’re starting from the wrong spot…if I have to protest in front of you to make you treat me right. Something’s not right about that. So no one from our communities has ever asked me if we should just partner with a larger bank.”

Insight for Those Who Care

Abello’s reporting should be a boon to the credit union community.  For as Robert Burns wrote of this ability to see what others may not:

O wad some Power the giftie gie us To see oursels as ithers see us! It wad frae mony a blunder free us, An’ foolish notion: What airs in dress an’ gait wad lea’e us, An’ ev’n devotion!

Music For Holy Week

Christ on the Mount of Olives, by Ludwig van Beethoven (1803)

(https://www.youtube.com/watch?v=5ZKWcn7bqsQ&t=41s)

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The Lehman Trilogy and the Arc of American Finance

The local Shakespeare Theater’s run of the story of Lehman Brothers family in America incorporates multiple themes.  They are all very much  present in America today.  I believe they  can inform the credit union story.

The play is an adaptation of a novel about the Lehman family. Three actors portray 55 different characters in the 163 years of the family’s timeline.

Although the firm’s $600 billion bankruptcy was the central drama of the 2008 financial crisis, the family had long been absent from any leadership roles when this occurred.

An Immigrant Story

The play is the story of a German Jewish family settling in Montgomery Alabama in 1844.  After first opening a dry goods store, they expand to become  “middle men” in the cotton trade between southern plantation growers and Northern textile mills.

They eventually open a New York office to enhance their trading activity and expand to other commodities post Civil War.  These trades include wheat, coal, iron ore, that is  the raw materials at the center of America’s industrial revolution.

As their trading activities expand they become a “bank” and underwrite the new industries being founded  from railroads to computers and entertainment after WW II.  Eventually these material commodities are supplanted by stock trading which brings the firm close to collapse in 1929.  Outside owners will now control a majority of the firm.

Post WW II trading activity dominates its traditional investments in other industries. These traders buy out the firm’s presiding CEO, Pete Peterson, putting their priority on a strategy that eventually leads  to the 2008 failure.

The story of growing economic wealth is interwoven with the family’s old world religious and family values. Jewish celebrations are initially central to life, but gradually become less so as succeeding generations assimilate into American culture.  Their religious observance is “reformed.”

A Three Part Saga

Part family history, part portrayal of evolving moral values and part the story of how finance becomes central to American enterprise give the play multiple layers of meaning.

As I watched this century and a half saga, many parallels with the present day credit union story come to mind.

Credit unions have largely moved away from their focus on a local group or community to become a diversified mixture of legacy founders and new market expansions.  The values and passion so critical for success in early years have been replaced by professional managers brought in for their expertise.

Growth becomes central to reporting success.  Corporate wealth creation versus member well-being is celebrated.  Instead of open governance, oversight is increasingly concentrated in a few hands where leaders perpetuate their tenures.  Rather than paying their success forward to future generations, incumbents explore options to cash out when their term in leadership is ending by turning control over to other firms.

The Past Is Gone

The Lehman family gradually lost control of their “bank” when market circumstances required new capital.  Evolving  financial trends for their trading skills also changed the firm’s purpose.  Middleman roles gradually evolved from buying and selling actual commodities, to underwriting new businesses and then merely trading pieces of paper, i.e.  stocks.  Ultimately finance became just digital transactions.

In this new world, everything becomes a number.   And everything has a price. Finance becomes just a way to make money, versus investing in tomorrow’s economy.

Buying and selling (acquisitions) become critical skills.  Member/customer trust is eroded because   consumers no longer believe you will be there for them.  Money management becomes the epicenter of success.  All ties to previous values and economic roles are ended.

That in short is the story of Lehman Brothers creation.   Is it an object lesson for credit unions?

 

 

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What Credit Union’s Can Learn from the FHLB System

This month the Congressional Budget Office (CBO) released a 27-page report analyzing the Federal Home Loan Bank System.

The significant chapters include an Overview, Financial Condition, Subsidies and Risks.

The FHLB system is the largest lender to credit unions. Hundreds of credit unions have capital invested in individual banks and rely on them as critical partners for liquidity and ALM management.  At 2023 credit union borrowings reached a peak in the system’s history:

The Central Liquidity Facility

How can the cooperatively owned, tax exempt FHLB, created to serve the savings and loan system, thrive with credit unions while their own funded CLF plays no role at all? Certainly, the borrowing demand is there.

At February 2024, the CLF reported $913 million in total assets, equity of $862 million and one loan for $1.0 million.

A 5% return on the fund’s retained earnings of $42 million would pay all CLF’s operating expenses.  It’s 4th quarter 2023 dividend of 4.62% trailed the overnight market by .75%. Why aren’t members even receiving a market return on their shares?

More importantly, what can credit unions learn from the CBO’s analysis and the system’s response?

The CBO and FHLB Summary

Ryan Donovan, CEO of the Council of the Federal Home Loan Banks posted a reply #FHLBank to the CBO report: “it does a fair job of acknowledging the many things we have been saying.” He singled out a number of key success factors:

Private investors — not the government or taxpayers — bear the cost of any “subsidy” associated with the FHLBank system.

The FHLBank system plays a valuable role in providing liquidity to its members, particularly during times of market stress.

The benefits the system provides accrue not only to the members but to borrowers and the public. In fact, it says,

“Lower financing costs on FHLBs’ debt are passed along through lower rates on advances than members would receive when borrowing in private debt markets. In turn, competition leads members to offer lower rates to borrowers.”

“Because members are both owners and customers of FHLBs, almost all of the subsidy (after afford-able housing payments are deducted) probably passes through to them, either in the form of low-cost advances or, to a lesser extent, through dividends.”

The existence of the FHLBank system “reduces mortgage rates and provides liquidity to the housing market, particularly during period of financial stress.”

The FHLBank system poses very little risk to taxpayers. If one accepts the CBO’s figure of $600 million in federal tax exemption, the roughly $1 billion that the FHLBanks will distribute in affordable housing and community development grants this year seems like a very good investment for taxpayers.   

Donovan concludes: The report stymies critics . . .because CBO makes clear FHLBanks pose little risk, they provide significant public benefit, the implicit guarantee is perceived by bond investors and the benefits of the system flow through to borrowers and communities.

The FHLBank system is poised to deliver $1 billion toward affordable housing and community development . . .We’re engaged every day with our members and other stakeholders on how those resources can be used most effectively.  (end)

All these housing and community benefits should be possible with the CLF.  Why isn’t this happening?  What might a CBO report on the CLF say? Would anyone care?

Music for Holy Week

With each daily post I will be adding excerpts from some of the great classical music inspired by this Holy Week. Today’s is the “Resurrexit” from Berlioz Messe Solennelle.

(https://www.youtube.com/watch?v=K-RX0XtBBnw&t=29s)