Category: Cooperative Design

Posted on

Are Credit Unions Being Disrupted?

Disruption is both an adjective and a noun.  A word to describe changes upsetting the status quo in a market.  And a way to compete against larger and stronger foes.

The business theory with this name was formalized by Clayton Christensen. In this interview with MIT magazine the essential ideas are laid out.  He describes the circumstances as follows:

Disruptive innovation describes a process by which a product or service powered by a technology enabler initially takes root in simple applications at the low end of a market — typically by being less expensive and more accessible — and then relentlessly moves upmarket, eventually displacing established competitors.

Disruptive innovations are not breakthrough innovations or “ambitious upstarts” that dramatically alter how business is done but, rather, consist of products and services that are simple, accessible, and affordable.

In this process identifying the “job to be done” for the consumer is an important insight.  See below for the example of a disruptive example coming at credit unions from below.

The Adjective

A second approach to understanding disruption is to identify some consequences that become visible in markets when the process is at work.   Is the credit union system being disrupted?  What would be indicators?  Who is doing it?

Author and speaker Greg Satell wrote in an April 1, 2023 article “4 Signs Your Industry is Being Disrupted.” Among the four are events that may be familiar.  Note he is not writing about credit unions or even financial services.  Some of his terminology may seem more appropriate to manufacturing, but I believe his observations are still helpful in understanding where competitors are emerging.

One sign is maturing technology.  The truth is that every major technology has a similar life cycle called an S-curve. It emerges weak, buggy and flawed. Adoption is slow. In time, it hits its stride and enters a period of rapid growth until maturity and an inevitable slowdown. That’s what’s happening now with digital technology and we can expect many areas to slow down in the years to come.

A second is consolidation, or mergers.  Yet when an industry is in decline, the forces external to the industry get the upper hand. With new market entrants and substitutes becoming more attractive, customers and suppliers are in a position to negotiate better deals, margins get squeezed and profits come under pressure.

That’s why a lot of consolidation in an industry is usually a bad sign. It means that firms within the industry don’t see enough opportunities to improve their business by serving their customers more effectively, through innovating their products or their business models. To maintain margins, they need to combine with each other to control supply (or I might call it vendor relationships). 

The third response he calls “rent seeking and regulatory capture.”

The goal of every business is to defy markets. Any firm at the mercy of supply and demand will find itself unable to make an economic profit — that is profit over and above its cost of capital. . .

That leaves entrepreneurs and managers with two viable strategies. The first is innovation. Firms can create new and better products that produce new value. The second, rent seeking, is associated with activities like lobbying and regulatory capture, which seeks to earn a profit without creating added value. In fact, rent seeking often makes industries less competitive. . .

It seems like they (rent seeking industries) are getting their money’s worth. . .Occupational licensing, (read new charters) . . . restrictions have coincided with a decrease in the establishment of new firms. If your industry is more focused on protecting existing markets than creating new ones, that is one sign that it is vulnerable to disruption.

His fourth indicator he calls the Inevitable Scandals.   He cites Thernos and WeWork as examples.

He might have included the ongoing compliance problems at Wells Fargo or the recent failures of well capitalized institutions such as Silicon Valley and Signature banks as “scandals”—although it is still unclear who all the contributors to these failures are.

Who Is Coming After Credit Unions’ Members?

Disruption is a constant factor in competitive markets.  Firms try to respond to these pressures in both self-protective ways as well as the more formal response in Christensen’s theory.

Where is credit union competition coming that  would fit both descriptions?  In many credit union consolidations scale is cited as the dominant motive, suggesting that bigger players are the greatest threat to credit unions’ future.   Apple Pay, Walmart Financials services, even some recent fintech firms such as Rocket Mortgage, SoFI or other product centric online platforms will take away critical member-product segments.

But my two favorite examples of disruptive competitors using Christensen’s analysis are Venmo’s peer to peer payment transfer and Chime, a neo bank.

Venmo was described by a 21 year old financial writer in an article last year.   The person-to-person payment application requires a depository account, but then begins to function as a broader transaction option overtime.  While it must synch with an existing account from which to draw funds, this would seem just the first step in becoming a dominant player in processing multiple kinds of consumer financial transactions.

My favorite example is Chime which describes itself as the #1 Most Loved Banking App.   The firm’s goal is to be the entry point to a person’s financial institution by making digital banking easy.  It lists some benefits as follows:

Online banking made easy

No minimum balance requirement or monthly service fees

 Manage money 24/7 with the #1 most loved banking app

 Get paid up to two days early with direct deposit

 Deposit checks from anywhere

One of the most enlightening interviews about Chime is from January 2022 in which founder Chris Britt is interviewed by the CEO of Goldman Sachs.

The whole strategy is easily followed in this 17 minute interview.   Listen carefully to how Britt describes his addressable market description (paycheck to paycheck); “we are not a bank”;  how incumbent providers pay attention to only the top 20% of users;  how direct deposit is the pathway to his customers; and designing the firm’s services to match unmet consumer needs.  Listen also to the role of core values.

Chime is a classic example of Christensen’s theory.  There is nothing in this model that credit unions could not do or have not done in the past.   I believe however that many credit unions have moved “up market.” Now firms like Chime are after the market credit unions were originally designed to serve.

Review again this disrupter’s description of financial strategy–a transaction business with a subscription service.   Note his relationship with regulators: Respect the Rules.

This model is what credit unions were designed to be.   Is Chime signaling that  we left our core members and purpose behind?

 

 

 

 

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

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

What Is Purpose?

From a philosopher:

As a species, we can’t choose whether we worship — it’s built into us. However, we can choose what we worship. 

Purpose and worship-two sides of the same coin.

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

When Actions Speak Louder Than Words

Last Friday I received the following email from a credit union’s CFO:

“My CEO and I were discussing the new offering from the Feds, the Bank Term Funding Program (BFTP).  We have outstanding borrowings due over the next few months.  Liquidity is still tight.  I am considering utilizing this program as the current rate offered is almost 65BPs less than the FHLB 1-year term.

“I sat in on an “Ask the Feds” session on Wednesday to learn more about the program.  I’m curious as to your thoughts on utilizing this source of funding for Credit Unions.  Do you know of any CUs that have received any funding?

“Also, I’d love to hear what you think as far as there not being any negative stigma attached to institutions that do receive funding from this source.  Borrowing from the FRB is usually viewed negatively as it is seen as the “lender of last resort.”  During the webinar, the speakers assured everyone this would not be the case with this program.”

The follow query was posted by a credit union member on LinkedIn early last week:

I am thinking of transferring all my money. To my 2 credit unions !!!  Why is it more secure??

Latest Actions Taken

The following are reports  by the Fed and the FHLB system to respond to the financial firms’ liquidity needs. From a Reuters report on the FHLB system on March 13, 2023:

U.S. Federal Home Loan Banks beefed up their lending war chests on Monday to provide more liquidity to banks amid continued higher-than-usual demand for funds as the fallout from the collapses of Silicon Valley Bank and Signature Bank reverberates through medium- and smaller-size financial institutions.

The FHL Bank system raised $88.73 billion by selling short-term notes with maturities from three months to one year on Monday afternoon, according to Informa Global Markets, a provider of syndicated bond data. The offering was raised from an initial $64 billion due to high demand.

Bloomberg on the Fed’s lending ;program as of March 16, 2023: 

Banks borrowed heavily over the last week from two Fed backstop facilities. Data published by the central bank showed $152.85 billion in borrowing from the discount window—the traditional liquidity backstop for banks—in the week ended March 15. It was a record high and a staggering increase from the $4.58 billion borrowed the previous week. The prior all-time high? It was $111 billion during the 2008 financial crisis. 

“Talking Points”

From press releases by CUNA’s CEO Jim Nussle: “Credit union deposits are safe, secure and insured.”  A March 17, CUNA  headline: “Credit unions are a safe harbor.”

Chairman Harper ‘s words at NCUA’s Thursday. March 16,  monthly board meeting:

“Consumers can remain confident that their hard-earned deposits at federally insured credit unions are safe, just as they always have been, and that the NCUA will continue to act expeditiously, when needed, to preserve the stability of the credit union system.”

Vice Chair Hauptman offered no liquidity initiatives. Rather he lists actions NCUA has taken he believes relevant to the current situation.  (emphasis added)

“Even though there’s no analogy to the Silicon Valley Bank and credit union system, previous boards and this board have been urging credit unions to ensure they have appropriate sources of emergency liquidity.

“At the same time, we have urged Congress to strengthen the Central Liquidity Facility, the CLF, by allowing corporates to act as agents for subsets of members. When interest rates started rising, we published guidance on NCUA’s NEV, Net Economic Value methodology – that guidance clarified that credit union management must have an appropriate plan for managing interest rate risk.

“I’ll also note, a little while back, we encouraged the use of interest rate derivatives for exactly situations like this. The events of this past week underscore exactly why we were so concerned about interest rate risk. And this board is very aware that it is fairly unprecedented the rate-hiking cycle we’ve been in. We know it’s not easy to manage, but that is what credit union management is paid to do.”

“I’m grateful for the hard work by credit unions and NCUA to ensure confidence and a safe and sound system. I know springtime is often annual membership meeting season for a lot of credit unions. No doubt, some members will have questions. I hope you credit unions out there will use this opportunity to educate members not only on your credit union, but the credit union difference.” (end excerpt)

His message is clearly a preemptive defense of the regulator’s accountability.  “NCUA did all we could.  If there is a problem in a credit union, it is not on us.”

Credit unions might wish the NCUA board in is quarterly updates had been more diligent in monitoring the NCUSIF’s interest rate risk.  Or that the CLF had been made “shovel ready” versus asking for more resources and authority when existing ones had not been used since 2009. For that’s what the NCUA Board is paid to do.

When Action Counts

The two federal “agencies” that credit unions are using (after the corporates) are the FHLB and the Federal Reserve.

The CLF is missing in action , and silent, even though it has the same “protracted lending authority” as does the Federal Reserve.

This is not a credit issue. In each bank failure to date no one has pointed to an absence of capital compliance. There have been other regulatory shortcomings mentioned, but not capital. As one observer noted: The main takeaway is capital is not king; it’s a court jester.  Confidence is king.  Runs start from lack of confidence, and no amount of capital is enough.

The foundation for system stability is action not words. Confidence comes from seeing those with responsibility being proactive versus  reactive; public versus silent; and fact-based versus rhetorical reaffirmations.

CLF Missing In Action

Credit unions and their members are addressing similar concerns about their ability to access funds.

What’s going on at the CLF?  Where is the initiative shown by both the FHLB system and Fed with actions now to meet liquidity needs? Is the CLF capable of providing same, or even next day, liquidity?

This is the moment to show that the CLF can be relevant, responsive and a vital factor in coop resilience.  If the NCUA and credit unions fail to join together in this moment, this week, then why have a CLF at all?

 PS:  If a credit union can share their experience borrowing from the FED and provide answers to the CFO’s questions above, please post in the comment section.  Thank you.

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.

Posted on

Credit Unions and “Proper” FinTech Partnerships

Ancin Cooley , founder and principal of Synergy Credit Union Consulting, has just released a six minute video addressing a key strategic question: How to assess a Fintech business “partnership?”

In the video he uses an analogy that illustrates the difference between a symbiotic and a potentially parasitic relationship. You can watch it here.

I believe his illustration also relates to other forms of third-party business arrangements.  For example, indirect auto lending is an important source of auto loan volume for many credit unions.   The challenge is who is the credit union’s customer? The dealership or the borrowing car buyer?  Can it be both?

Take a look.  Note his observation that not all Fintech relationships are the same.

(https://youtu.be/pyDm7oykBYE)