Category: Cooperative Design

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Bringing the Next Generation into Leadership

This is how one family introduces their children to credit unions, from a post earlier this week.

The parents take their role seriously.  The baby is growing up.  They are now helping her become familiar with  credit union leadership responsibility.

She is looking to find the page on youth programs.

Here it is.  One hopes more senior credit union volunteers spend this much time reviewing their board policies, especially on succession planning.

A High School’s Entrepreneurship Program

I graduated from Springfield High School. It  never had a program like the one described in the SHS student newspaper from January 25.

The opening  introduces  a dedicated teacher helping students learn about the realities of small business.

For years, students have been restricted by the confines of the educational system, simply following the “status quo” and doing the bare minimum just to graduate. As time has passed, schools have developed their programs and have prepared students to genuinely pursue opportunities that never seemed possible for a regular high school student.

Springfield High School has developed a plethora of programs for students to grow their experience for potential careers, one of which is the entrepreneurship program. 

Karri Devlin, a veteran teacher at SHS, runs this program with the intention of helping students reach their full potential as a business owner. “We try to emphasize the importance of leadership and creativity in regards to starting your own business. We talk about how to promote your business, and how to manage it financially. They also learn how to sell a product and collect the money. Students can pick their marketing team and sell their own product on what’s called Market Days at lunch. They’ll set up their products at lunch and we’ll try to sell them to the student body. We have some grant money that helps buy the supplies but the students pretty much have to come up with the money for the supplies I don’t provide. They also have to determine the markup and how much they’re going to sell it for to make sure that they can cover their costs.” 

After describing one student’s efforts, the article closes with this observation:

From Mrs. Devlin’s entrepreneurship program, to creating their own businesses, student entrepreneurs have proven time and time again that they have an unstoppable drive. . .With their innovative young minds, they are the future of the business industry. And to those who do not possess the entrepreneurial spirit, support your classmates by buying local! 

This high school in Springfield, Illinois would seem an ideal opportunity for credit union partners in this  hands on, real world  of “classroom”  startups.

Update on the Federal Reserve’s Special Bank Term Lending Program (BTLP)

A week ago I reported that credit unions with only 9% of total financial assets, had taken down 27% of the emergency BTLP.

Also that financial firms were now arbitraging the special fund by borrowing and reinvesting the funds in overnight reserves, earning a spread.  Borrowings had grown from $129 billion at yearend to $168 billion this week, in a period of quiet markets.

That opportunity is now over.  The Fed announced the facility will close on March 11.  The 307 credit union borrowers of $35 billion (as of September 2023) will have to pay off their loans or shift borrowings elsewhere.

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Credit Unions’ Origins versus Their Future Stories

As a state and federal regulator for eight years, credit union directors would sometimes come up during conferences to show me the original membership card in their wallet.  The important part was the number on the card.   Whether it was a single digit or other very low numeral, it validated the owner’s presence and belief at the cooperative’s founding.

Many credit unions summarize their beginning under the About section on their web sites.  The theme is that from a few committed persons and minimal dollars, see how far we have come today.

Jim Blaine presented the SECU (NC) founding story in a recent post.   A few excerpts provide you a flavor of his imitable style as he contrasts the official version with one member’s reality.

Creation stories are intended to provide us with an explanation and some reassurance that “stuff doesn’t just happen”. These stories are often called “creation myths”, or that fancy word “cosmogony”. . .

Folks at SECU for decades have gathered around the campfire to hear our creation story… “On June 4, 1937, 17 state employees and teachers in Raleigh pooled their meager resources of $437 to form State Employees’ Credit Union…” and the rest is history.  Sounds almost like a religion or cult following doesn’t it? Well, for some of us it is… 

But, as with most idealistic ventures, there is usually a back story. Way-back-when, I received an enlightening letter from long-time member Paul Wright. . .which begins:

“Back in 1932 I was a liquidating accountant for the State Banking Department. Mr. Gurney Hood was Commissioner of Banks and we had about 10 accountants and 12 or so bank examiners – all the banks were in trouble back then.”

You can read the specific impetus driving this unusual organizational effort in the full blog which concludes with Jim’s observation:

😎 Well, I did get a “kick” out of the letter and it did not in any way tarnish my belief in those “17 apostles”, with $437 who believed, with great purpose, that they could “capitalize on the character of their coworkers and help each other attain a better economic status.”

Wanted to share the “TRUE STORY” with you because today: 1) many credit unions – and one in particular – seem to have “forgotten” why they were created, 2) seem to have “forgotten” who they were created to serve, and 3) seem to have “forgotten” that most of their member-owners still often live in a “paycheck-to-paycheck”, “lend me $10 ’til payday” world of economic stress….… and of course, wanted to 4) remind the bankers that from its “creation” all SECU was ever trying to do was to save them from themselves… (still trying!)

Future Stories

History matters, whether factual or embellished by time and future events.  It gives perspective on present circumstances and hope for how we might envision future opportunities.

But sometimes the always changing events in which we live cause some to say they have had enough.  The forces driving the profession in which I labor are just too overwhelming.  I’m no longer comfortable and need to get out.

An example is the resignation last week of Harvard’s football coach of 30 years.   He had an extraordinary record as summarized in this article:

He ended his career with 200 wins, and, with a 17-9 victory over Dartmouth on Oct. 28, surpassed Yale’s Carm Cozza to set the record for Ivy League coaching wins. During his tenure, Harvard won 10 Ivy League titles and defeated the archival Yale Bulldogs 19 times, including nine straight from 2007-2015.

He also led the Crimson to three undefeated seasons — in 2001, 2004, and 2014 — leading Harvard to amass the sixth-best winning percentage in all of Division I football since 2000. Throughout his career, he won the New England Coach of the Year award eight times and was named a finalist for the Eddie Robinson Award — awarded to the top coach in the Football Championship Subdivision (FCS) — on five occasions.

So why did he retire, still young and in many ways at the top of his game?  The driving motivation was changes in the college football model, specifically paying players through the “name, image, likeness” opportunity.  Here is his blunt assessment:

“College football is changing dramatically and certainly not for the better,” Murphy said. “When people ask my opinion of what’s going on in college football, I give them a very simple explanation. It absolutely — positively — is professional football, only without any rules whatsoever.”

Some very successful credit union CEO’s and boards are voicing a similar lament about their industry.  The challenges are just too numerous: technology, regulation, changing competition, lack of volunteers, little member loyalty and of course ever pressing competition.

As they look ahead,  these CEO’s and boards give up and retire.  Change has made it too hard to continue even after demonstrated successes of 40, 50 or 80 years—it is time for them AND the credit union to go, in their future outlook.

Tomorrow I will share an example of one credit union’s “future story” after 66 years of stable and focused growth.  It determined  it wouldn’t be able to continue and had to merge to continue to serve members.

The difference between the Harvard football coach’s retirement and these credit union leaders is the credit union leaders decided to withdraw from the game.   Harvard will find a new coach who will want to tackle the challenges of competing in a time “of no rules.”

Also the credit union decided to give up and transfer all of their ample resources to another organization.  It would be similar to the Harvard athletic department confirming Coach Murphy’s insight and declaring, “From now on Harvard is not going to field a football team.  So just root for Yale or whatever school you prefer.  And any young men who might want to play, don’t apply to Harvard.”

The instances of credit union leaders closing up shop is becoming more widely presented as an acceptable strategy.  The decision is oblivious to whatever “creation story” the credit union told its generations of members who created the  bountiful legacy that is given away to outsiders who had no role in its success.  There is not even an effort to find a new coach.

The other disturbing aspect of these “future rationales” is that sometimes the leaders use the closure to enhance their own personal futures.  It would be like Coach Murphy deciding to take all of Harvard’s footballs and memorabilia with him when he leaves saying, I deserve this because I made it all happen.

A college, or for that matter any football team’s future, does not depend on a single coach or even player.   There is an institution, an organization, or even a league that supported the decades of every team’s individual efforts.  I believe it is time for these supporting organizations and their alumni to speak up.  The institutions they built to benefit future generations are being unilaterally shutdown.

 

 

 

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Will There Be a Credit Union in This Person’s Future?

Photo from a third generation credit union family.

However, will there be an option of a member-owned cooperative in her future?  Her mom and dad and grandparents have worked in credit unions for most of their professional lives.

This week  I will write about some of the internal challenges facing the movement.

Coincidentally,  Jim Blaine is beginning a series-Consider This– of forceful posts on what makes the credit unions unique.  It is a good primer for those who cannot attend a DEI week.

His first “chapter” in the series is called The Difference.  The next is The Difference is Real.  The third discusses “genericide” or The Kleenex Dilemma.  A brief excerpt:

What is “The Kleenex Dilemma” for SECU as a credit union? Like it or not, try as you might, when an SECU member is asked: “Where do you “bank”?, the member will invariably say “At the credit union!”  See the problem? The word “bank” owns the financial institution category in the mind of the public – and that probably is not going to change any time soon.

So, what has SECU done about the kleenex problem?. . .

His target audience is the entire SECU family, especially the board. These posts would be a helpful resource and live case study for any credit union volunteer-paid or unpaid, every industry regulator (especially NCUA) and of course the public.

If we want our children and grand children to  become  “member-owners” I hope Jim’s logic and some examples this week of wayward activity may “steady” the movement on its course.

 

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Credit Unions Top Users of Bank Term Funding Program (BTFP)

At the end of the September quarter, credit union total assets of $2.25 trillion were just 9.7% of total banking assets.  However their participation in the special emergency Federal Reserve lending program equaled 27% of the BEFP’s loans at yearend or three times their share of total assets.

The September 2023 call reports show 307 credit unions with Federal Reserve borrowings  of $34.9 billion, an average of  $114 million.  For these credit unions, the Federal Reserve represents 66% of their total borrowings.  For 112 of this group, the Federal Reserve is their only source.  The largest reported loan is $2.0 billion and two credit unions report draws of just $500,000 each.

In an ironical coincidence with the BTFP participation, this total was also 27% of all credit union borrowings at the quarter end of $130.3 billion.  Moreover this $35 billion was only a small portion of the reported $173.4 billion in total lines these credit unions  had established with  the Federal Reserve.

Most of these loans were drawn following the banking liquidity crisis in March.  The Fed created the  emergency Bank Term Funding Program (BTFP) after the Silicon Valley Bank failure to prevent a system wide run by uninsured depositors on other depository institutions.

This facility was different from traditional Federal Reserve programs.  Eligible collateral security was expanded,  all collateral was valued at par, not market , and draws could go up to one year.  The rate for term advances under the Program is the one-year overnight index swap rate plus 10 basis points. The rate is fixed for the term of the advance on the day the line is drawn down.

What Happens Next?

In a January 9, 2024 speech to Women in Housing the Federal Reserve’s Vice Chairman  for Supervision, Michael Barr, was  asked about the program’s future when the initial one year life is over. Here are portions of his reply:

Moderator: I wanted to ask you about the future of the BTFP. We are rapidly approaching the one-year mark, is this something where the Fed is planning on extensions, or any information to be released to the public on usage?

Vice Chair for Supervision Barr:  So when the funding stress happened in March 2023, over the weekend the Federal Reserve, FDIC and Treasury agreed to a systemic risk exception to least cost resolution for the FDIC. And the Federal Reserve and the Treasury worked together to create an emergency lending program for banks and credit unions, the Bank Term Funding Program that you are referencing. And the Bank Term Funding Program enables banks to use collateral that was in place as of that time – as of March of 2023 – that is, essentially Treasuries and agency mortgage-backed securities, to pledge those, and to be able to get borrowing against that up to a year at the par value of those securities.

That program was really designed in that emergency situation. It was designed to address what in the statute is called unusual and exigent circumstances – you can think of it as an emergency. . .we want to make sure that banks and creditors of banks and depositors of banks understand that banks have the liquidity they need. And that program worked as intended. It dramatically reduced stress in the banking system very, very quickly. And deposit outflows which had been very rapid in that short period of time normalized to what had been going on before and in fact maybe flattened out to some extent a little bit.

So that program was highly effective, banks and credit unions are borrowing under that program today, but it was really set up as an emergency program. It was set up with a one-year timeframe, so banks can continue to borrow now all the way through March 11 of this year. . .a bank could continue to borrow or refinance under the program and in March of this year have a loan that then extends to March 2025. 

I expect continued usage until that end date of March 11, but it really was established as an emergency program for that moment in time.

Arbitrage Opportunity Grows Outstandings

Two days after Barr spoke, the Wall Street Journal published an update on the program: Banks Game Fed Rescue Program.

The article reported that the BTFP pricing, based on the benchmark interest  rates average  plus 10 basis points, was less than the 5.4%  the Fed was paying on overnight excess reserves. This arbitrage opportunity has resulted in an increase of  $12 billion in more drawdowns since yearend even though  no liquidity strains were apparent in either system.

Credit unions can request extensions up to one year until March 11, 2024.   After that date, the statement above and the most recent activity suggest the program will end.  Credit unions should plan to either repay or tap other sources of liquidity.

And the CLF?

It should be noted that the Central Liquidity Facility reports no loans this year as of its November financial statements.   In fact it has initiated no new loans since 2009. The BTFP participation suggests credit unions certainly have liquidity needs. However  the CLF, designed to serve and funded totally by credit unions, is not as responsive as the Federal Reserve Banks.

 

 

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A Lesson from the Latest FDIC Premium Assessments on Banks

Last Friday the four largest banks in American announced their  4th quarter and full year financial results.

All had one new, significant expense in the 4th quarter.  Here are the numbers from the New York Times article: Biggest Banks Earn Billions, Even after Payments to the FDIC Fund-(January 13, 2024)

Bank                         $ FDIC Payment

JP-Morgan                  $2.9 billion

Bank of America        $2.1 billion

Wells Fargo                 $1.9 billion

Citigroup                     $1.7 billion

These premiums are necessary to cover the costs for the FCIC’s losses on bank failures earlier in 2023.   FDIC’s reported  loss expense through the first three quarters of 2023 was $19.7 billion.

The FDIC is collecting approximately $16.3 billion in this fourth quarter assessment. The four largest banks will pay the $8.6 billion shown above  or 53% of the total.

Premiums comprised more than 81% of the FDIC ‘s total revenue through the first three quarters of 2023.  Interest income from the FDIC’s investments, the other revenue source, would cover FDIC ‘s operating expenses.  But the $600 million excess would not even begin to cover the almost $20 billion in estimated  insurance losses.  (all data is through September 30, 2023).

FDIC Premiums and Insured Deposits Not Connected

There is no relationship between premiums and FDIC’s insurance coverage of $250,00 per account.  Instead premiums are calculated on  a bank’s net assets which is called its “assessment base.”  At September 2023 this was $20.7 trillion versus just $10.7 trillion of insured shares.

FDIC’s revenue is no longer based on its stated goal to protect depositors’ savings but rather the FDIC’s  role in stabilizing  the entire industry’s balance sheet.   When banks succeed, shareholders win.  When banks fail, everybody pays.

FDIC’s Complex Pricing Structure

The FDIC may set the premium at whatever level it deems necessary to achieve its minimum ratio goal of 1.35%.  The fund recorded an approximately $10 billion operating loss through the September quarter putting the ratio  at just 1.13%.    The $17 billion new assessment is needed cover this shortfall and grow the fund’s ratio target.

Moreover premium rates can vary from 2.5 to 42 basis points  depending on bank size, that is whether an institution is more or less than $10 billion in assets. The final rate is based on each bank’s CAMELS rating plus, for larger firms, a scorecard which measures  “complexity.”

The assessment rates are so complicated  that the FDIC  posts three different calculators for banks to determine what amount they must pay.

This premium system provides virtually no check and balance on pricing, except the rule making process.  It is frequently “updated” and always open- ended in amount. There is no incentive or check and balance on FDIC effectiveness in its oversight or problem solving roles.  Banks must bear the costs not only from institutional failures but also from FDIC’s supervisory effectiveness, good and bad.

The Cooperative Alternative in the NCUSIF

By comparison the NCUSIF is simple to understand, administer and monitor.  Statements are posted monthly.  Public board  updates on investment returns and overall financial trends are presented at least quarterly so credit unions can track their cooperatively designed fund.

The 1% deposit underwriting means premiums are extremely rare, assessed only four times in 40 years since the 1984 redesign went in effect.   Dividends have been paid out over a dozen times.

When the 1% deposits totals are added to the retained earnings, the investment portfolio remains relative in size to the insured risk at all times.  Investment income has proven adequate to  meet all of the fund’s operating expenses and sustain a stable operating level between 1.2 and 1.3% of insured savings.  Based on the latest November NCUSIF financial report the fund’s equity should be at or above the long-time upper cap of  1.3% at yearend 2023.

With NCUSIF equity at the high end of the .2-.3 range, it means there is over $1.7 billion in additional  reserve for any contingency.  In the October NCUSIF update the CFO reported the five-year loss average since 2017 was only .1 of 1 basis point.  The net actual cash loss so far in 2023  was just $1.0 million in the same update.

With over 40 years of data from all economic cycles, financial crisis and evolving credit union business models, there are decades of real data to validate the NCUSIF’s financial design.  This record shows that to maintain a stable NOL a yield  on investments of 2.5-3.0% would sustain the fund through virtually any growth or economic cycle and any operating contingency.

This historical 1.3 % cap is due for Board review in February based on 2023 yearend earnings.   This decision is an important commitment  of  NCUA  to the credit unions who  underwrite the fund.   Unlike the FDIC’s premium dependency, the NCUSIF’s investment portfolio return has proven to be a reliable,  predictable and sufficient model-in all environments.

Therefore, when net income exceeds the NOL cap, the credit unions are paid a dividend on the excess income recognizing their overall sound performance.  This return is a critical element of the cooperative design.

The FDIC’s premium model is unpredictable, subjective and arbitrary,  and most importantly unrelated to the actual insurance coverage per account.

Why the NCUSIF Design Works

The credit union model is based on the historical operational and cooperative  values on which credit unions are founded.  All participants are treated equally.  Risk and expenses are shared alike for all.  It is democratic and accountable in its structure.

The redesign was accomplished with industry-wide  collaboration and participation.  It required congressional approval. It was based on the oldest of cooperative concepts: self-help.  No government assistance or funding was sought or necessary.

Instead the credit unions put themselves in the law as the underwriters of the fund’s resilience, no matter the circumstance.  This is how they intend to maintain their independence as a separate financial system.  For example the S&L’s were merged with the banks and the FDIC when their system collapsed.   Unlike the for-profit, stockholder owned banking system, the moral hazard examples of excessive risk taking by management are extremely rare in the cooperative model.

Understanding NCUSIF’s unique history and design and why it fits credit unions so well is especially important whenever a new board member comes to NCUA.  It will be especially critical Tanya Otsuka be informed of NCUSIF’s special character and long term performance, as much of her professional background is within the FDIC.

The February NOL setting will be the first of many opportunities she will have to show her understanding of the differences between bank and credit union regulation.  Credit unions should be communicating that distinction now.

 

 

 

 

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Credit Union Shareholders Receive $16 Million; NCUA Receives Judge’s Reckoning

Yesterday the Dakota Credit Union Association announced that NCUA had agreed to pay more than $11.9 million to the former credit union members of Midwest Corporate Credit Union.  Their pro rata share of US Central’s capital, along with a similar recovery by Iowa credit unions, will bring the total payments to over $16 million.

This outcome culminates efforts commenced in 2021 by the two Leagues and their members.  Ultimately legal suits were filed when NCUA rejected the credit unions’ repeated recovery efforts.

In his October 2023 ruling the Chief Judge of the US District Court District hearing the case wrote: “simple logic and hornbook property law support construing the FCUA as including automatic transfer of assets.  In general, assets do not simply evaporate when the owner is unable to collect; rather the property must go somewhere.

Consequently, a credit union’s asset likewise do not cease to exist come the last day of a wind-up.  Instead, the most logical conclusion is that the assets vest in the credit union’s shareholders.”

A Three-Year Bureaucratic Slog

According to an August 29, 2022 statement by the Dakota League challenging NCUA “To Do the Right Thing”, the Agency had actually been ready to release checks in 2021. NCUA changed its mind when informed that the (federally chartered) corporate had been voluntarily liquidated years earlier.

North Dakota’s two Senators wrote NCUA Chair Harper concerning the nonpayment. He replied on September 2, 2022 that “After careful review and legal consideration, the liquidation agent determined that because Midwest no longer exists no distribution can be made to Midwest or its former shareholders.”

The League tried the administrative claims process. Again NCUA denied the request.   President Olson’s response to this final effort in February 2023 showed his frustration: “This is a clear case of obstruction through bureaucratic hurdles and complicated language where the process is the punishment, and does not provide justice.”

The North Dakota League filed its lawsuit in April 2023.  This was followed in June when 63 of Iowa’s 75 credit unions sued the NCUA for $4.2 million to recover their U.S. Central claims. Joining in the lawsuit was the Iowa Credit Union League, its foundation, political action committee and an employee benefits company.

A Lesson in Bureaucratic Obstinacy and Blindness

These years long efforts included all three branches of government.  The Dakota league attempted to play NCUA’s administrative game in which it learned that “the process was the punishment.” It requested and received support from North Dakota’s  two senators.  Chairman Harper stonewalled the appeal from the legislature.

The last remedy was the judiciary. The judge explicitly rejected NCUA’s logic.  “The fund’s vest in the credit union’s shareholders.”

It is not a comforting example of regulatory judgment when common sense or “doing the right thing” apparently had little role in NCUA’s decision.  When dozens of staff lawyers and three “independent” board members see only one position, this raises concerns about the agency’s deliberative processes and/or the competency of the advice being given.

CooperatIve Action in the Members’ Interest

The good news is that cooperative efforts, especially at the league level, persistence and advocacy did prevail.  It is hard for an individual credit union to counter an NCUA position.  Collective action is a credit union advantage even in regulatory judgments.

The credit union shareholders, the members of Midwest and Iowa corporate, have received their just due.  And that standard, what is in the members’ best interest, should  be the determining one.

Thank you to the cooperative leaders in these two states that stood by their members.

(Editor’s Note:  I first wrote about the situation in February 2023, urging NCUA to do the right thing.

 

 

 

 

 

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January 1985: An Historic Turning Point for Credit Unions

For forty years, the NCUSIF has maintained  not only its own financial integrity but more importantly, the trust and confidence of the credit union system’s members. This record of stability began in 1985 and continues unabated through 2023.

Over the same four decades the FSLIC, the separate S&L fund, failed and merged into the FDIC.  The FDIC has had negative net equity on several occasions requiring an explicit government guarantee.  It has constantly modified  its premium model to accommodate numerous industry crisis.  These  include multiple premium levels, risk based pricing, an expanded assessment base for premiums, differential pricing according to institution size and other financial or accounting maneuvers. It’s equity to insured deposits has fluctuated from negative to 1.1% at June 30, 2023.

During this same period of national economic and interest rate cycles, the NCUSIF’s unique cooperative design allowed it to remain strong. The fund’s yearend equity level  of 1.2-1.3% of insured shares has always been met.  Premiums have been necessary only four times in this four decades.

“D” For Deposit Day

This fundamental  redesign was a two-year industry wide effort.

This priority came to fruition in January 1985 when the first 1% credit union deposit underwritings for the new insurance model were delivered to NCUA.  The event was pictured in NCUA’s 1985 Annual Report (pg 21):

(caption:  NCUA Staff Member Wayne Robb accepts a hand-delivered capitalization deposit in the unheated Washington lobby of the NCUA.)

The Chicago Tribune described this historic change in an article later that year:

“The solitary messenger clutched a plain brown envelope as he picked his way carefully across a deserted, icy sidewalk near the White House.  In- side was a check for $13 million.

“It was inauguration Day, 1985, a morning most memorable for the raw cold that forced cancellation of a parade and drove President Reagan inside to take his second oath of office.

“But for the messenger, and for the trio huddled around an electric space heater waiting for the check, it was also the deadline for credit unions to deliver payments to the new-look federal insurance fund that backs the deposits of 51 million credit union members.

“The $13 million check, the largest single payment, was from the huge Navy Federal Credit Union in Washington.

“The little-noticed transaction–one of more than 7,000 totaling $480 million that frosty January weekend–illustrates how the nation’s 15,000 federally insured credit unions have quietly put their house in order.

“Edgar  F. Callahan Chairman of the National Credit Union Administration said credit union’s willingness to embrace a new approach to shoring up their insurance fund was just one example of how the industry has recovered from the hard times of 1981.  

The challenge for his successor, Callahan said, is to keep Congress and other policy-makers aware that credit unions are unique.

“You’re in an industry this often grouped with banks and S&L’s and there’s a tendency to get painted with the same brush,” he said.  

“There is a danger to getting sucked into that atmosphere.  My successor will need to maintain that credit unions have been ahead of the problem curve and need not be grouped with other financial institutions.”

The Workup for Change

The NCUSIF was created in 1970, with no government-provided startup capital.  The Fund’s design mimicked the premium base of both the FDIC and FSLIC each which had a 35-year head start accumulating retained earnings.  But from 1979 onward the premium approach, even with doubling assessments,  did not prevent the Fund’s equity ratio from decline.

In April 1983 the NCUA presented a Report to Congress on the Credit Union Insurance Fund.  The Report was over 130 pages in seven chapters responding to specific Congressional questions and making four recommendations:

  1. All credit unions, federal or state, should have a choice of insurer;
  2. Capitalize the NCUSIF with a 1% deposit of insured shares;
  3. Authorized at least one uninsured share per member as capital;
  4. Keep the  insurance fund independent from FDIC/FSLIC due to the unique nature and role of credit unions.

The Report included direct quotes from leagues, private cooperative insurers, credit unions along with a history of credit union stabilization options prior to NCUA insurance.

Following the publication of this Report, NCUA and credit unions working in partnership developed an alternative to the traditional premium model describing it as, A Better Way.  It drew upon the two decade experiences of private insurer alternatives.  It rested on the fundamental cooperative concept that members should own their own fund.

The financial logic and analysis was summarized in a video sent to all credit unions and interested parties on the NCUA’s Video Network.  The following is an excerpt from this longer analysis,  A Better Way:

(https://www.youtube.com/watch?v=IlqxLeFkuLY&t=30s)

This redesign was achieved by challenging long time conventional governmental practice.  The alternative was drawn from cooperative experience and principles.

Trust in the Fund was not due to more regulation or open ended premium assessments.  It was constructed on mutual commitments including frequent and audited financial transparency, accountability for expenses and legislative guardrails.

This capacity to “imagine differently” resulted from collaboration and open communication at every step.  The historical financial analysis (above) and future forecasts were public, for all to review and refine.

The effort was not a sudden epiphany. Rather it resulted from hard work, shared viewpoints, a desire to create something better and courage to change.

The First Year’s Bottom Line

At the end of fiscal 1985, the fund held $883 million in 1% deposits.  Earlier in the year each credit union received a pro-rata equity distribution (in excess of the Fund’s .3% equity) of $80 million to meet the January 1% funding obligation followed by a $30 million cash dividend at yearend.

This 12.5% return on the 1% capital deposits was on top of fact that this was the first year since the Fund opened in 1970 that no premium was charged. (page 5, 1985 NCUSIF Annual Report)

In future blogs I will present how the fund  navigated specific economic and industry challenges.

Continued success does not rest on design alone.  Credit unions must also exercise continuous oversight of NCUA’s vital  responsibilities for fund management and supervisory oversight.

 

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The Person of the Year-One View

Scott Galloway is professor of marketing at NYU’s Stern School of Business.  He is a prolific writer, commentator and provocative analyst  of America’s economic successes and failures.

The following is an excerpt from a much longer December essay on current trends titled Prof G Person of the Year:

The real Person of the Year in 2023? A:  Money. 

I’ve experienced this firsthand, watching as faculty who can’t teach or pen relevant research create a weapon of mass distraction from their mediocrity: DEI. But that’s not what this post is about.

America is becoming more like itself every day: Money is the arbiter of … everything.

There’s a view that the rise of money is a good thing. Or at least not all bad. Human society has never been fair, and as long as people are status-seeking, competitive animals in a world of scarce resources, it won’t ever be. Historically, many of the lines that divided society traced innate characteristics like race or sex, were based on inheritance, or were determined by the exertion of physical strength.

Money doesn’t care about any of these things, and it has washed away barriers in ways that potentially make institutions more accessible. There are now nine Black American billionaires. Good news — and their rise is correlated to an increase in civil rights.

What stops this from being a Hallmark channel version of capitalism is that money, when not reinvested/redistributed (pick your word) quickly pools and concentrates, and innovation and competition decline. “Competition is for losers,” is how Peter Thiel puts it. And he’s following through, buying Senate seats (his protégé, J.D. Vance, is leading the charge to defund Ukraine) to secure the influence of his money.

We aren’t going to end the power of money any time soon. In an economy increasingly run on financialization, with so much wealth in circulation, our objective should be to ensure that it keeps circulating. Money = power, and power should be distributed as widely as possible. . .

My Comment

Galloway’s critique is one of the reasons for cooperatives such as credit unions in a capitalist economy.   That is until the alternative begins to act like capitalists.

I believe the greatest challenge for credit unions is not external–competition, economic uncertainty or technology disruption–but rather internal.   That is, the loss of confidence in who we are and how we try to counter the inevitable goals of more and more money and power, not for  members, but for our personal and institutional ambition.

The greatest challenge is how do credit unions re-engage with members, not as mere customers, but as real owners in the “distribution of power” as Galloway describes it.

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The “Goldilocks” Interest Rate Curve

Yesterday the treasury market closed at these yields for the maturities listed:

Yield           Maturity

5.50%        Overnight

5.55%         One month

5.46%        Three month

5.24%        Six month

4,80%        One Year

4.33%        Two Year

3.95%       Ten year

This inverted yield curve, where short term rates exceed long term, can be an ideal time for asset management.

This is because return and liquidity are both optimized by staying short.   If an asset or investment  manager is matching with specific liabilities, the prospect of a duration gap between asset and liabilities can be minimized.

This is a Goldilocks ALM environment where return and liquidity are both optimized.   By going long now, an investment manager will have a lower return versus staying short.  That might seem like a surefire market bet as Chairman Powell has forecast several  rate reductions this year.   That is until inflation possibly comes back, and further reductions put on hold.

The Credit Union Opportunity

An additional advantage, besides reducing ALM mismatches,  is that it allows balance sheet management to remain agile.   Shorter maturities provide more opportunities to respond to market and/or liability changes.

A prime example is NCUA’s management of the $22 billion NCUSIF investment portfolio.  The fund continued its 7 year ladder as rates went to near zero in 2019-2021.   When the market turned, the entire portfolio was underwater, burdened with an average duration of almost three years.

Through October 2023, the year-to-date return on the Fund is 1.92% and the portfolio reports a $1.7 billion unrealized loss.

When looking at historical trends, a yield on the NCUSIF portfolio of just 2.5% would result in a breakeven, that is stable, equity ratio in almost all years.

Recognizing this liability target for asset returns, makes NCUSIF investment decisions easy in this rate environment.  By moving from overnight to maturities up to two years, the yields would be more than sufficient income to maintain the Fund’s equity ratio at or above 1.3% for any scenario.

Many investment managers were surprised by the Fed’s rate reversal to counter inflation.  Today’s interest rates provides a rare moment for stabilizing both liquidity and return for credit union portfolios and the NCUSIF.

 

 

 

 

 

 

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Two Endnotes Going Into 2024

Excerpts from two perspectives for sustaining success as we head into the New Year.

Dream or Die

“All social entities or movements need dreams, which can be defined as an indispensable capacity to envision a future for themselves that considers both the practical means at hand and a higher ideal. Societies that do not dream are doomed to die.

“We have no knowledge of any human community where men do fail to dream,” writes Irving Kristol. “Which is to say, we know of no human community whose members do not have a vision of perfection—a vision in which the frustrations inherent in our human condition are annulled and transcended.”*

Source: *Kristol, Two Cheers for Capitalism, pg 153

JPMorgan’s $4 Trillion Balance Sheet Widens Lead Over Rivals – Firm has added the equivalent of one Wells Fargo since financial crisis

“As the spring bloodbath among regional banks began, nervous depositors with more than $50 billion began showing up at JPMorgan’s door. Bank executives went on to raise expectations for net interest income four times throughout the year, eventually pulling in so much cash that managers have taken to warning of “over-earning.”

“That’s put JPMorgan on track for the biggest annual profit in the history of American banking. Analysts predict that by the end of this month, its annual net income will be 36% higher than last year.

“By comparison, the combined earnings of the next five largest banks looks to be about 1%. For JPMorgan and its chief executive, Jamie Dimon, it was a year like no other.”  (Source:  Bloomberg, December 27, 2023)

As we turn the calendar’s page, which approach will be your credit union’s priority?