Category: Co-ops in Capitalism

Posted on

A Holy Week Theme: Money Changers and Temples

Managing money has always been political. And always will be.

A measure for credit unions:  “The extent to which we apply social values more than mere monetary profit.”

FDR and Credit Unions: “Push This”

Temples and Money:  Old and Modern

Cleansing the Temple

by Malcolm Guite

Come to your Temple here with liberation

And overturn these tables of exchange

Restore in me my lost imagination

Begin in me for good, the pure change.

Come as you came, an infant with your mother,

That innocence may cleanse and claim this ground

Come as you came, a boy who sought his father

With questions asked and certain answers found,

Come as you came this day, a man in anger

Unleash the lash that drives a pathway through

Face down for me the fear the shame the danger

Teach me again to whom my love is due.

Break down in me the barricades of death

And tear the veil in two with your last breath.

 

 

Posted on

Baseball and the Four Stakeholder Credit Union Model

A credit union’s relationship with its local minor league baseball team became more than a promotional opportunity.  It evolved into a strategic expression and expansion of its mission.

The Dayton Dragons (Dayton, Ohio) have the longest continuous sellout streak in North American sports history –1,441 games.   The team is the High-A affiliate of the Cincinnati Reds and plays in the Midwest League.

The team’s 2023 promotional video clearly highlights the credit union’s naming rights: the Day Air Credit Union Ballpark.  However the relationship with the Dragons goes much deeper than naming one of the most iconic venues in Southwest Ohio.

Both organizations have created a partnership that grows Day Air, the Dayton Dragons, and the economic vitality of the region.

Joe Eckley, Director of Marketing for the credit union, describes some of their joint activities:

  • Weekly meetings throughout the season to align strategies and prioritize promotions to drive fan engagement for the Dragons and member growth for the credit union.
  • Each year the two organizations develop a new promotion to meet a credit union-specific goal. The Dragons utilized their vast reach in the community to support this initiative.
  • During the off-season, the Dragons and Day Air work together on numerous events and promotions to benefit the community to enhance  key performance metrics for each organization.
    • College Prep Night
    • Business speaker seminars
    • 50/50 Holiday Raffle fundraisers
    • Annual 5k event.

  • The Dragons utilize their reach and community reputation to drive promotions for Day Air.
    • Special jerseys were only available at the credit union.
    • Food trucks and incentives for Day Air associates.
    • Sponsored donations to numerous organizations on the credit union’s behalf.
    • Mascot visits to Day Air locations.
    • Special ticket pricing for members
    • Discounts at the Dragons team store for Day Air members
    • Early access to exclusive events
    • Special service booth at Day Air Ballpark.

  • Day Air provides Dragons Associates, a SEG group, special member benefits.
  • Day Air supported the the Dragons throughout the pandemic when games were cancelled.

Building Community

The Dragons are a Dayton entity–they draw from the outskirts of the region to provide family friendly entertainment to all comers.

Day Air serves the greater Dayton area– people doing good for friends and neighbors. All the big banks in town are headquartered elsewhere (New York, Cleveland, Pittsburgh).

CEO Bill Burke says that from a strategy perspective, the naming rights partnership made sense because of the close alignment of both organizations for the community.

As a result the credit union changed its three stakeholder model to add a forth criteria when it obtained the naming rights.  All decisions are now run past the lens of the Credit Union, members, associates (employees), and the community.

The opening day on April 11 will continue the record sell out streak.  For the credit union, the Dragons and the Dayton community, it is a local celebration of two great American pastimes—alive and well in America’s heartland.

 

 

 

Posted on

D. Michael Riley’s Observations on “Creative Destruction”

In response to last week’s post on the impact of mergers on the future of the cooperative system, this former NCUA senior executive sent the following comment.

Mike Riley, December 1984

“Creative destruction” is uncomfortable to see in print. But it existed before Adam Smith, Malthus, Marx. Keynes, Schumpeter, and others began to try to explain the economic drivers and motivations that shape our world.

Cultural changes seem to be the main driver today. The personal seems to have switched to the impersonal, i.e. give me what I want on my terms with not  much regard to others. Fast and low cost are the motivators. (disclaimer: I love Amazon.)

We have to deal with what we have.  I am concerned about sound credit unions merging.  When I was a new examiner, I had 30 -40 credit unions who were below $100,000 and none of the rest I had were over a million. And no, I did not start in 1934.

This was in the seventies. They were basically in small towns or in rural areas where there was a factory of some sort. As I visited them (most were happy to see me, albeit a regulator, to hear about the outside world), it was obvious that the Board and Committees were involved in the credit union. Their members and the Treasurer were most involved of all. They were making loans on washers, dryers, refrigerators. Most of their members had no real access to credit except at an exorbitant rate. No savings accounts available to the members.

The credit unions really cared about their members. I remember one credit union was trying to decide on whether to make used car loans. They wanted some advice from me.  About 8 months later I came back and before I could start the exam they wanted me to go out and look at this used car and meet the borrower.

They were so proud of this accomplishment. (As a good regulator, I did check to see if the loan was to a Board member or family member.)  It seemed to be a good loan. Not to get maudlin, but this shaped my views of what credit unions are. And fortunately, the larger credit unions were much the same.

After I moved on, I tried to keep track of these credit unions. Around 1990 I put together a list of where these credit union were. I couldn’t find a few; but a little other 20 had liquidated because the factory closed down or the key people left or retired. Another 30 or so had merged either voluntarily or involuntarily. About 6 were still alive and functioning. To be fair, at the same time the American economy was undergoing a major transformation and jobs and manufacturing were moving overseas.

Ongoing Mergers

This ongoing march continues. The merger of two sound credit unions without some legitimate reason doesn’t seem to be member oriented. I still think of the members of those small credit unions who received services such as buying a washer that no one else would do.

Bigger is not better if the member does not benefit.  How many of these mergers produce lower loan rates , higher dividends, or distinctly better products at a lower price? Carried to the extreme we will be left with 20 credit unions that are no different than large banks.

NCUA’s Role

Schumpeter opined “If someone wants to commit suicide, it is a good thing if a doctor is present.”

Posted on

A Gen Z Story About Money Management in the Digital Era

(by Marit Hoyem, a junior  at Williams College)

Last summer I interned for Callahan and Associates where I wrote blog posts about my generation’s financial outlook and spending habits. As a Gen Z and local Credit Union member, I provided a perspective how credit unions can better serve their next generation of  members.

Currently I am studying abroad in Edinburgh, Scotland where I faced new financial challenges and learned valuable lessons about spending, budgeting, and saving money.

The Venmo User

During this time, I found myself reflecting on a prior  post, “Hello Venmo (Goodbye, Checking Account)”.  This discusses how Gen Z sees P2P payment services as de facto checking accounts, sharing money back and forth without ever using their credit union account.  Please see that piece for information  on Venmo and how phones facilitate Gen Z spending.

I first got Venmo in high school. What started as a way to split the cost of movie tickets or dinner through my phone has gradually evolved into a form of social media with friends. On the app we can see who our friends are paying and leave little messages with our payments that appear on a Twitter-like feed.

As I have gotten older, I have continued to do more transactions with the app, for much more money. Next semester I will split groceries and utilities as well as pay my rent using Venmo.

From Physical to Digital Spending

While I have done my fair share of splitting costs using Venmo while abroad, what has resonated during my experience in Scotland is how digital money affects how I budget and spend.

In Europe cashless payments are becoming the norm. In restaurants, grocery stores, and pharmacies, to make a payment all I do is double-click my power button and let Apple Pay do the rest.

After my first month in Scotland,  I checked  if I was sticking to my expense budget  I was shocked to see I had gone way over the amount of planned spending. One of the issues was that I was paying in a new currency, pounds, and wasn’t always doing the mental math to see the amount in American dollars.

Although there are ways to check my payments daily on my credit union app, it was difficult for me to follow just how much was leaving my account while paying for food, bedding, and other necessities.  I see the issue now–growing up in the era of digital money, I never had to take cash out of my wallet, physically count out dollars, or go to the ATM when I ran out.

This isn’t to say that my generation is irresponsible with their money or careless spenders and borrowers.  Rather, our perception and experience  of money is fundamentally different from older generations.

We grew up using phones, cards, and apps to pay for things, not cash. Credit Unions should note this difference in spending habits and offer money management solutions for digital transactors.

Better Money Management

Something that helped me understand my budgeting issue was to go on my credit union app, look back at my recent transactions, and add up how much I was spending each week on necessities (such as groceries) versus indulgences (like eating out with friends).

I think a great service for Gen Z members would be to make this categorization easier. For example, splitting up purchases on a mobile app by month, by location, or by dollar amount to help members track their spending habits.

In a world of cashless transitions, seeing the money available and visualizing the cost of something is harder for everyone, especially those who only make purchases with their phone.

Credit Unions have an opportunity not only to be a checking account, but also to serve as an educational and budgeting resource for their members.

Empower and encourage members to track spending.  Give them an opportunity to learn from moments of spending exuberance (as I did).

 

 

 

Posted on

Is “Creative Destruction” the Future of Credit Unions?

One of Austrian-American economist Joseph Schumpeter’s descriptions of capitalism was called “creative destruction.”

This refers to a competitive economy’s relentless efforts to innovate for advantage and market dominance.   He described the process as: “the old way of doing things is constantly getting destroyed or supplanted as it is replaced by a newer, better.”

Some would suggest that business failures in a competitive economy are an inevitable and necessary event, even when they cause local hardship or dislocations.

The cooperative system is supposed to be immune from some of these economic forces. Credit unions are owned by their users, they have no traded stock, cannot be bought and sold as private firms, and reflect the values necessary for a communal, versus for-profit, enterprise.  Their founding, focused on a ”local” constituency with a common bond, is intended to improve the welfare of a community, not just individuals.

Local Destruction Where Dreams Become Reality

One example of this “creative” process is in neighborhood across the street where I live.   There is no home sold for less than $1.5 million and when offered, most list for at least twice that amount.

Even with this going-in price tag, Edgemoor is not a place for old homes.  No matter the asking price,  every purchase becomes a tear down.   Here is an example from across the street this past week.

The builder, entrepreneur, risk taker and innovator.

The destruction phase.

The front view.

This home built during  the depression was sold as is for $2.0 million.  About five or more large white oaks were cut down before the demolition started.  The land and location are so valuable that the builder will put up a mac-mansion of enough square feet to justify a new sales price at least double his cost.

Obviously, whoever buys this new home will believe this is progress, just what they were looking for. This is the free market at work.

Credit Union Destructions

We can debate the social and political implications of tear downs to build back bigger and more expensive homes, office buildings or condos.   But the example is not limited to real estate.  It happens in credit unions.  It is called mergers.

The key question is whether mergers are helping or hurting the credit union system–to be more precise, the mergers of sound, well capitalized long standing credit unions which have served their markets for generations.

Everyone undertaking a merger believes their new creation will be bigger and better.  Any downsides will be temporary.   Mergers are just a way of getting to the future faster especially when asset size is believed to be THE essential for competitive competence.

No Creativity, Just Destruction

Now to be fair, the house across the street had not been well maintained.  The owners had lived there for four or five decades.  The yard and landscaping were totally neglected.   The 80 foot tall oak trees made the property look like an unkempt urban jungle.

So whatever goes up after this tear down, will certainly be a visual and living enhancement-except for the missing trees.

Similarly, some sound credit unions have not been well maintained.  Leadership is just holding on until retirement; the board has given up leadership responsibility.   Selling out looks like an easy way to take care of members when the motivation has gone.

It becomes time for a new generation of leaders to take over the credit union’s legacy and continue serving members in the future.

An Existential Vortex

These easy-exit examples are becoming more numerous.  Personal advantage, not member value, appears to be the motive.

The systemic risk is creating an “existential vortex”  where all credit unions, not just the small, the poorly led or even the ambitious, are caught up in a system that is  increasingly circling the drain.

There are no new charters.  Industry assets are more concentrated. The leadership purpose  is more and more institutional growth and success.  The members, are not owners in any sense of the term, but merely customers used as the means to greater financial glory.

Credit unions competitive advantage has been collaboration and interdependence.  This is how the cooperative system was created, their regulatory institutions were differentiated, and why purpose justified a tax exemption.

Creative destruction destroys legacies, whether buildings, companies or credit unions.   New brands emerge.  Old locations closed.  New markets and business models tried.

Credit unions are not rebuilding on their old foundations.  Instead large mergers are just the age-old, typical financial market strategy of buying up competitors to become more dominate and survive.

I don’t think the merging of well run credit unions is sustainable.    It will take over two years before the new home is ready on the now demolished site and the new owners move in.   This  is also about the operational transition timeline of a large merger when members start to look for other options.

Unfortunately the creative destruction in credit unions is not putting new homes in place of the old; it is just moving all the occupants into the existing one.

Schumpeter believed that capitalism would gradually weaken itself and eventually collapse. Specifically, the success of capitalism would lead to corporatism and to values hostile to capitalism, especially among intellectuals.

In an historical irony, cooperatives intended as an antidote to the excesses of capitalism, are instead succumbing to the allure of free market takeovers.

Everyone wants to own a bigger house.

Posted on

The Wisdom of Elders

In talking with a retired CEO who still follows credit union events, I asked how his perspective had changed.

“I don’t feel the intensity or nuances from the grind of the day to day.  . . or the tactical lust for short term passions.”

Without an organization’s boundaries, the retiree tends to be more observant of general trends.

An example of this capability is John Tippets,  who retired as CEO of American Airlines FCU in the first decade of this century.  In retirement he continued to consult in strategic planning sessions and speak at credit union events. During the 2008/9 financial crisis he was the interim CEO for three years at the troubled North Island Credit Union, which he saved from a regulatory closure.

Before his credit union roles John spent about 25 years in the for-profit world of American Airlines.  Most of that time he was an Officer with Sky Chefs, an American airport restaurant and concessions, and airline catering, subsidiary.

He has had multiple retirements and career involvements.  He and his wife Bonnie have written a book, Hearts of Courage published in 2008, the story of his father’s survival from a plane crash in Alaska in 1943. The story behind the book is in this 2009 article.

There have been two CEO’s since John at the credit union. The airline sponsor has gone through much turmoil including bankruptcy, mergers and leadership changes.  The relationship of the credit union and its sponsor has continued strong even through numerous board changes.

The one strategic change John made as CEO was to take advantage of the TIP field of membership option.  This permitted the personnel of other employers, co-workers at the airports, to become members of AAFCU. Airports in many ways became the credit union’s communities.

Speaking on Leadership

A favorite topic for John is his Principles of Leadership which he developed into a 50 slide presentation to the Aerospace conference in 2018.

The speech summarized his multiple professional and personal interests in a diagram similar to the UCLA basketball coach John Wooden’s nine principles of leadership.  Here is John’s organizational template using a similar framework for credit unions.

The slides develop each of the nine points using examples from his numerous life experiences.  The speech summarizes his approach to leadership.  It also characterizes how he sees meaning in his multiple organizational and personal responsibilities.

The Underutilized Resource

John is now working on a book about his 25 years in credit unions.   His activities are just one of multiple examples of credit union leaders who have stepped down but continue to follow credit union events.  For many, these professional years are the most satisfying responsibility they have had.

Look around.  There are examples of professional experiences and resources in every community, often like John, willing to provide perspective and an occasional assist.   They see the world differently, often with more clarity than incumbents might assume.

And sometimes they are even delightful guests for the board, employees and members to hear from when those occasions arise.

In his book, John talks about his father’s  recounting his story to youth leaders.  Joseph would encourage them to keep teaching the lessons, because even though they might not seem to care, “kids are hearing and someday they may really, really appreciate what they learned.”

Life stories are not just for kids. For the past is never past, but always present.

Posted on

Respecting Cooperative Owners: The One Thing Essential

This past week’s financial runs show how fragile consumer confidence can be.

A critical distinction in credit union design is democratic ownership-one member one vote.

One of the challenges however is that it is easy to treat owners only as customers.  The fact is that many “owners” today are ordinary consumers attracted by a competitive rate or other marketing message.  In some cases, the customer is just an indirect loan borrower who had minimal voice in the selection of where the loan was made.

There is a difference between customers and owners in a financial institution.

Customers do not vote for directors at the annual meeting;

Customers do not vote on merger proposals for their institution;

Customers do not have a residual interest in the reserves of their firm.

Ownership is traditionally honored in other communications such as members’  founding stories or recognizing those who have played special roles in the credit union or cooperative system.

The One Thing Essential

Transparency is one critical leadership characteristic that acknowledges the owner’s role.

Without full, continuous and open communications, the default is to treat owners as customers.  That unfortunately is the attitude of many in positions of leadership today.

Most importantly lack of transparency on specific credit union commitments means the owners have little or no basis for their responsibility of electing directors.

A Regulatory Shortcoming

An example is from last week’s subordinated debt rule approved by NCUA.  Every party to the transaction is provided full information:  Senior management/boards, the brokers, the consultant, NCUA, and most importantly the individuals and entities (including other credit unions) that buy the debt.

Debt issuance of $100 and $200 million have been completed in the past 12 months. The only persons not provided the details of these events are the owners.  It is their loyalty that is the basis for issuing these borrowings that can now extend as far as 30 years.

Without transparency, there is no possibility of accountability.  The owners are removed from any role in governance.  NCUA presumes its in loco parentis role if something doesn’t go according to plan-a distinct prospect with terms of 10, 20 and now 30 years.

Senior Management and Board Compensation

Only state-chartered credit unions are required to file IRS form 990 which discloses senior management and board compensation, political donations and other activities such as grants for all non profits.

These disclosures are essential for owners to know the incentives and circumstances board and management have agreed to in leading the credit union.

Compensation consultants today are plentiful  with four part plans and multiple ways to structure payments now or later.  There are increasing references to a “change of control” clause which would trigger executive payouts no matter other merger bonus and benefits negotiated by the CEO.

Without compensation transparency there can be no accountability.  State charters have disclosed this for decades.  The same logic applies to federal charters.  This information is an important step in owner oversight, even consumer protection.

The Place and Time to Start Showing Trust in Owners

In the months ahead, most credit unions will hold their annual meetings-in person and virtual.  In preparation the annual audit will be available, a Chairman’s report prepared and other required business conducted including election of directors.

Some meetings will include updates on projects such as a new building or branch expansion, a report by a foundation or community activity.  Others will include an educational presentation, an outside speaker and even a meal.

The annual meeting is a primary opportunity for leadership to engage with owners in open and full conversations.

It is especially important in light of recent examples about the resilience of regional and smaller banks.   Confidence in an institution is based on trust.   Trust is not created in a day or by a special press release about a firm’s financial standing.  It is a relationship founded on open communication as both customers and owners over years.

Nothing could be more important this year than showing coop owners that the CEO and board  deserve their trust by being fully transparent with facts and open to the members’ questions and points of view.

That is how free markets are supposed to function in a competitive economy. That is how democracy is supposed to work.

 

 

 

 

 

 

Posted on

An Irish Weekend and Remembrance

As Bucky Sebastian reminded me many times about this past weekend, “Everyone’s Irish.” St. Patricks Day comes in the middle of Lent because an Irishman could not go for forty days without a drink.

At least that’s one theory.

So I got out my best Irish hat and tried out his thesis with a dark lager and two helpings of shepherd’s pie. There was even a vegan option.  Here’s the outcome.

Ed Callahan Remembered

Which reminds us of the great Irishman who believed in his deepest being, the potential for credit unions. This is Jim Blaine’s, March 17, 2016 portrait of Ed.

“Always suspected that the problem with Ed Callahan was that as a youth he was beaten too often by Nuns in parochial school or, perhaps, not beaten enough. Well, whatever, either way the Nuns left their mark – an indomitable spirit!

Ed Callahan was Irish – brash, pugnacious, loud, hard drinking, fun loving – alive! But why be redundant? I said he was Irish!

For over a quarter of a century, we all watched and observed as Ed Callahan created shock waves in the credit union world. No one was neutral about Ed Callahan. His friends were fiercely loyal, his enemies equally committed. Ed inspired many and angered quite a few. Ed had style; he had presence. With Ed, you weren’t allowed to make contact without becoming involved, excited, immersed, engaged.

At Marquette, Ed must have played football in the same way he played life – without a helmet. You had no doubt that Ed Callahan always played for keeps. He had no intentions of losing, that was not one of the options. Ed was very straight-forward; your choices were always clear. The mission was defined; and, there was only one direct path to the goal. That path was either with you, around you, over you, under you, or through you; you could step aside or get on board. It was your choice; but your choice never changed the mission, nor the path, nor the goal.

Some said that Ed was a visionary…

… they were wrong. Ed Callahan was a revolutionary. Visionaries talk about change, revolutionaries take you there. Ed led from the front – a leader of conviction, rather than convenience; principles above posture – courageous. Revolutionaries, by definition, create problems; overturn apple carts; rebuke the status quo. That happened at NCUA. Appointed by President Reagan, Ed arrived at NCUA in the midst of turmoil. Ed defined the mission; he reformed and remolded the Agency. He taught a regulatory agency how to stop working to prevent the last crisis. He explained that a coach never executes a play and that on Monday morning it’s never hard to see what went wrong – but it is rarely relevant. Teacher, coach, lessons in life; hopefully well learned, hopefully still remembered.

But let me celebrate the essence of the man – that indomitable spirit – one last time, for those who never had the opportunity; for those who still have doubts; for those who never fully understood. One of Ed’s harshest critics, noted with much wryness, that even in death Ed “couldn’t get it right”. Why, I asked? “Because Callahan died on March 18th instead of on the 17th, his beloved St. Patrick’s Day.” You know this type of critic – cynical, smug, self-assured without much basis, not really worth the effort, but…

Just for the record, I would simply like to point out one final time that – first and foremost – Ed Callahan was a fully-fledged, fully-flagrant Irishman – body and soul! And, no self-respecting Irishman would ever celebrate the end of St. Patrick’s Day until the last bell at the pub had rung. That would have meant that Ed Callahan’s “last call” would have come sometime after 4:00 am – on the morning of the 18th. Style, presence, courage – true to the last! A shamrock of joyful vigor and purpose!  

And one last thought… in the final analysis you can say many things about a great man’s life… some men are admired, some are respected, some are envied, some are feared… and countless other adjectives and accolades. But, in the final analysis, the most important thing you can say about a great man is… he will be missed. ” 

And, Ed Callahan will be missed…  

 
Posted on

THE Credit Union Lesson from SVB and Regulation

In a news conference following the failed Bay of Pigs invasion of Cuba, President Kennedy remarked:  “Victory has a thousand fathers, but defeat is an orphan. “

The SVB’s failure proves this adage untrue.  The press and numerous pundits have already assigned multiple parentage: the CEO and management, the Fed’s rapid rate increases, regulatory and examination shortcomings, the external auditor’s clean opinion, the Silicon Valley customers $40 billion twitter run, Trump’s deregulation in 2018 and the Biden administration DEI policy objectives.

When everyone and everything is to blame, then no one is accountable.  Just another “black swan” event. With more investigations/hearings to come, each new revelation will just add to the piles of condemnations.  No lessons taken away.  More regulations of course, for this is the default response whenever the barn door is left open.

A Spotlight on One Factor

From all these commentaries, I want to highlight one aspect that contributed to overlooking this risky situation. This factor has just become a part of the credit union regulatory eco-system.

In responding to my analysis earlier this week, Doug Fecher, the retired CEO of Wright-Patt Credit Union in Ohio, commented:

This situation makes me wonder if NCUA’s new “RBC” standards would have flagged the risks to SVB’s balance sheet. From what I can tell, much (most) of SVB’s investments were in “risk-free” treasury bonds and high quality agency securities, which in NCUA’s RBC formula would have earned some of the lowest risk multipliers.

To me it is another example of the folly of RBC-style risk management regimes … and why NCUA was wrongheaded in its pursuit of RBC.

This point of view is not limited to Doug’s observation.

During his time as Vice Chair of the FDIC, Thomas Hoenig challenged the agency’s reliance on risk-based capital requirements.  He questioned both the theory and practice, pointing to the lending distortions which contributed to banking losses during the Great Recession.

He wrote about the SVB failure in this commentary:

The regulator apparently relied on the bank’s risk-weighted capital standard for judging SVB’s balance sheet strength. Under the risk weighted system government and government guaranteed securities are not counted as part of the balance sheet for calculating capital to “risk-weighted” assets.

This allowed the bank to report a ratio of around 16%, giving the appearance of strongly capitalized bank. However, this calculation failed to account for interest rate risk in its securities portfolio or the risk of having a highly concentrated balance sheet. It misled the public, and apparently the regulators.

In contrast, if the regulator had focused on SVB’s ratio of equity capital-to-total assets, including government securities, the ratio falls to near 8 percent; and if they had calculated the ratio as tangible capital-to-assets (removing intangibles and certain unbooked loses from capital) the ratio would have fallen to near 5%.

What this would have disclosed to the world is that the bank’s assets could not lose 16% of their value before insolvency but only 5%, a stark contrast.

Had the regulator not relied on the misleading risk-weighted capital measure, it might have take actions sooner. A simple capital-to-asset ratio, tells the regulator and public in simple, realistic terms how much a money a bank can lose before becoming insolvent. The regulatory authorities need to stop pretending that their complex and confusing capital models work; they don’t.

RBC and Credit Unions: A First Birthday

RBC became the surrogate capital ratio for all credit unions with assets greater than $500 million one year ago on January 1, 2022.

Before this in a September of 2021 analysis, Why Risk Based Capital is Far Too Risky. Hoenig is quoted:

“A risk-based system  inflates the role of regulators and denigrates the role of bank managers. 

We may have inadvertently created a system that discourages the very loan growth we seek, and instead turned our financial system into one that rewards itself more than it supports economic activity.”

RBC and Asset Bubbles

Shortly after the critique of regulatory incentives induced by risk weighted assets, in Asset Bubbles and Credit Unions (JANUARY 10, 2022) the consequences from potential Fed tightening were noted:

When funding looks inexpensive and asset values stable or rising, what could go wrong?

The short answer is that the Fed’s inflation response will disrupt all asset valuations and their expected returns.

The distorted results  caused by RBC was presented in Credit Unions & Risk Based Capital (RBC): A Preliminary Analysis in February of this year.  Among the findings:

The 304 credit unions who adopted RBC, manage $822.7 billion in assets.  But the risk weighted assets total only $479 billion.  That 58% ratio is the NCUA’s discounting of total assets total by assigning relative risk weights. and,

One credit union with assets between five and ten billion dollars, reports standard net worth of 12.5% and an RBC ratio of 48.3%.  

This February analysis using June 2022 data of RBC credit unions showed that:

250 of these 308 credit unions reported unrealized declines in the market value of investments that exceeded 25% of net worth.   Four credit unions reported a decline greater than 50% of capital.  This was before the five additional Federal Reserve’s  rate increases through the end of the year. 

RBC’s primary focus is credit risk, the loss of value from principal losses from loans or other assets.  Balance sheet duration mismatch is not captured as are other common management errors:  concentration in either product or market focus, limited or no diversification of product or market, or  just simple operational mismanagement.

These common challenges become amplified by insufficiently considered non-organic growth forays such as third party loan purchases or originations. Whole bank acquisitions are an example of such risks often accompanied (disguised?} by growing amounts of the balance sheet’s intangible asset, goodwill.

The RBC proxy indicator for safety and soundness creates a distorted impression of real institutional risks.   Managers learn to game the system so that boards, members, and regulators fail to understand the institution’s total financial situation.

And when along comes a change in underlying assumptions, like the Fed’s rate increases, the previously unrecognized vulnerabilities quickly appear.

RBC creates for some institutions a theoretical capital ratio that is nothing more than a “regulatory  house of cards.”  SVB will not be the last example.

As Doug Fecher recommended in his 2016 comment letter on the proposed rule, “RBC should be a tool, not a rule.”

To his credit,  Kennedy learned from the Bay of Pigs misjudgments when the Cuban missile crisis occurred in 1962.

 

 

Posted on

An “Important Message From Our President and CEO”

Immediately following Silicon Valley Bank’s (SVB) failure, credit unions and banks sent messages to their members or customers.  They affirmed that  their institutions were safe. It was also common to point out that that they did not have SVB’s business model or its exposures.

Effective communication is an art, especially in a crisis.  The audience is used to receiving marketing promotions.  This situation is very different from those routine messages.

This special contact should be authentic (even personal), drafted for the event, and include relevant facts for the specific circumstances.

The following are examples from two CEO’s, one from a bank and the other a credit union.  Following each is a response from the audience.

March 13, 2023

Dear Customers and Friends of VeraBank, (posted on the bank’s web site’s landing page)

I want to take this opportunity to address what is going on in the financial markets, regarding the orderly liquidation of Silvergate Capital Bank, the closures of Silicon Valley Bank and Signature Bank, and how it relates to VeraBank.

It understandably creates worry any time there is a failure in our industry. Let me reassure you, these banks are nothing like VeraBank, and we have no exposure to the issues leading to those niche banks’ downfall.

Both Silvergate and Signature Bank focused heavily on volatile crypto industry, and Silicon Valley Bank was the largest bank serving start-up technology businesses and venture capital firms involved in that industry. These banks did not practice the prudent diversification of revenue and risk, unlike VeraBank and the great majority of community banks in this country. For instance, at the close of 2022, 97% of Silicon Valley Bank’s $175 billion in deposits were uninsured, and they only had $12.5 billion in cash on hand to cover those deposits. As of closing this past Friday, only 30% of VeraBank’s deposits are uninsured, and we have over $928 million in cash on hand or 87% of our uninsured deposits in cash on hand to cover any customer liquidity needs. I can assure you that is a very high level for our industry.

In other words, where Silicon Valley had only 7.1% of their uninsured deposits covered by cash on hand, VeraBank has 87% covered. We also have liquidity sources that could fairly easily increase our liquidity by close to twice the amount we have now. At VeraBank, we have always understood the importance of good liquidity and risk management. VeraBank is funded with stable local deposits from the communities in which we do business and not the kind of “hot” and unreliable money that funded the three institutions that are now failing.

VeraBank has been through many good and bad economic times, and we continue to operate with the same conservative philosophies that have served us well for over 93 years. 

Most recently we went through the Great Recession of 2008-09, the ups and downs of the oil and gas markets of the last 15 years, and a global pandemic, and we have not missed a beat.

Actually, it has been just the opposite at VeraBank: we have thrived because we understood the importance of risk management. We understand that we serve each of you and do not dare put your money at undue risk.

Please do not confuse VeraBank with these other banks and others you may hear about in the weeks to come. I am very confident in our bank and how we protect our customers. Please reach out and talk with any of my 500+ colleagues if you have any concerns at all. Let me provide you with my cell number, 903-649-8790, so you can feel free to text or call me directly if you would like to talk about these issues.

Thanks for your continued support,
Brad Tidwell

The response:  according to an evening business news report, Tidwell received over 700 calls spending most of his day on the phone.

VeraBank was established in 1930 at the height of the Great Depression, is a privately-owned community bank that serves East and Central Texas with its network of 38 conveniently located branches in East and Central Texas and has $3.5 billion in assets.

A CredIt Union CEO’s Email to Members

SAFE AND SECURE SINCE 1933

 

I’m pleased to report that Golden 1 Credit Union continued to thrive in 2022 and finished the year in a strong financial position. Throughout the year, our 1.1 million members were able to rely on Golden 1 to deliver financial solutions with value, convenience, and exceptional service. Please view our 2022 Annual Report for more details.

For 90 years, Golden 1 Credit Union has been a safe haven for our members’ money and a trusted partner for the financial products and services they need. Golden 1 exists to serve our members and we take our responsibility to you and your trust in us very seriously. That’s why we employ prudent risk management practices in our decision-making, including diversification of our portfolios, protecting Golden 1 and its members in volatile economic periods.

As the nation’s seventh largest credit union with assets nearing $19 billion, Golden 1 Credit Union is a well-capitalized financial institution with more than $1.3 billion in net capital. Golden 1 Credit Union also has access to more than $10 billion in available liquidity to absorb any potential impacts of shocks within the financial markets.

Safe and secure since 1933, we remain steadfast in our commitment to ensuring our members can thrive financially.

Thank you for being a valued member and putting your trust in us.

Sincerely,

Donna Bland
President and CEO
Proud member and employee since 1994
 

A Member Responds:

Ms. Bland,

Suggestion: If you are going to send out an email blast starting with “I’m” as in “I’m pleased to report…” make sure that your Member/Owners (?) can contact you personally (and not have to guess at an email address because you may be too busy to respond to us plebeians…).

As a credit union that is supposedly member owned, WE (your members) should have an open line of communication with transparent abilities to see how our credit union is run on a daily basis.  

Again, this includes open lines of communication to ANYONE in our credit union, including a directory of staff.  As a member that is hearing impaired, a telephone is not a particularly viable option but email certainly is. . .

This is the first email that I have received concerning the operations of G1 since becoming a member over a year ago.  There should be email blasts to indicate G1 annual reports as well as opportunities for election to the board of directors…

This email is meant to be a frank/direct/open suggestion for improvement of member communications with the actual member/owners of G1.

Thank you,

A Comment

Each reader or CEO can choose which approach best fits their style.

As the credit union member suggests, this kind of member contact should be more frequent.  It would include other items that the owners (not customers) would find useful or relevant, not just when a special event occurs.  For most art generally improves with practice.