The Dangerous Goal of “Parity”

As pundits, regulators and congress have looked at what should be changed in the wake of the three recent large bank failures, one focus is how FDIC insurance is structured.

A precipitating event was mass withdrawals by uninsured customers, prompted by social media alarms. Using their Dodd-Frank “systemic risk authority,” the FDIC took over the banks and covered all depositor balances while it worked to find a least cost resolution.

This customer behavior has prompted suggestions for changing FDIC coverages to reduce this risk potential. CUNA and NCUA have publicly stated that the NCUSIF should have “parity” in any changes to FDIC insurance.

Here is one trade’s position: Credit unions must receive parity with banks in any deposit reform legislation, CUNA wrote to House Financial Services and Senate Banking, Housing, and Urban Affairs Committee leadership Monday. Congress and the Federal Reserve have indicated interest in deposit insurance reform in the wake of recent high-profile bank collapses.

“Our primary concern regarding any deposit insurance reform legislation passed by Congress is to ensure that credit unions receive parity, fair treatment, and equal protection with banks,” stated CUNA President Jim Nussle in his letter to Congress.

I believe this public posturing is dangerous to the future of the NCUSIF and to credit unions separate financial system. Here is why.

Credit union CEO’s and industry leaders have rushed to assure their members, the public and Congress that credit unions do not have the problems that caused the banking failures. They are more financially resilient.

The first proof of this basic difference is that 92% of credit union savings are covered by NCUSIF, whereas only 44% of bank deposits were FDIC insured. This point was presented in Callahan’s Trend Watch analysis this week in the following graph.

The obvious Congressional question is why do credit unions need whatever changes FDIC might make if the balance sheet structures of cooperatives are fundamentally different from the banking industry?

Politically it would seem unwise to request parity before any legislation has even been introduced. For in drafting any change Congress can easily respond to credit unions’ request with a simple bipartisan solution. They could mandate there be only one federally managed deposit insurance fund, the FDIC. That would be true parity. For the FDIC already merged the separate S&L FSLIC fund.

The factual response to this Congressional possibility is that the NCUSIF is different in both structure and purpose from the FDIC.

Since the NCUSIF’s financial redesign in 1984 into a cooperatively-funded deposit model, credit union insurance has not required federal backing, even during the corporate crisis. By legislative intent, the NCUSIF is backed entirely by members sending 1% of every savings dollar to the fund. This capital base grows along with insured risk. This base provides sufficient revenue so that premiums are rare. That revenue option is a last resort and can be used only when Congressionally established financial levels are reached.

As a cooperative, the fund is required to pay dividends when reserves exceed the Normal Operating Level, historically 1.3%. The FDIC’s structure gives it only one means to cover increased risk—charge ever higher premiums on an expanded asset, not just the insured savings base.

The two federally managed “insurance” funds have fundamentally different roles which reflect the character of the institutions they cover. The credit union model is a not-for-profit, member-owned consumer focused coop. This system has a much different purpose than the for-profit commercial banking model. The NCUSIF is also a source of temporary recapitalization to sustain a coop hit by uncontrollable financial events. In banking, the FDIC cannot provide assistance to private owners.
CUNA and other credit union support for “parity “ with the FDIC could unfortunately be used to buttress Chairman Harper’s stated intent, from his first day on the NCUA board, to build a larger fund. His proposals would abandon legislative guardrails and add premiums as a regular option to expand the fund’s size relative to credit union risk.

There is nothing in the NCUSIF history that would support this desire for a larger fund. The Fund has performed though multiple economic cycles and financial crises that forced the FDIC to resort to multiple special premiums. The FDIC has no cap on how large its fund can be relative to its insured risk.

The downside of the NCUSIF’s financial success is that it has become a “piggy bank” from which NCUA draws increasing amounts to pay for its expanding operating budgets. Instead of paying for insurance losses, the majority of fund revenue is used for NCUA’s operating expense. This overhead transfer rate is currently 62.4 %, even though federally chartered credit unions are only 50% of insured risk.

The legislative constraints that are a part of the redesign passed in 1984 were to address credit unions’ fundamental concerns with an open-ended perpetual deposit underwriting commitment. The apprehension was: “If we just keep sending 1% of deposit to NCUA every year, what prevents them from just spending it.”

If Congress were to change how FDIC insurance coverage is based, it won’t be a single action. Legislation will come with additional rules and regs, increased financials tests, and stronger regulatory powers for examiners and supervisors to mandate changes when deemed necessary. There will be a significant regulatory quid pro quo if coverage is changed.

Credit unions, who in their own analysis, say they are unlike banks, would become a part of this new regulatory avalanche. One need only think back to 1998 when bank PCA was mandated by the Credit Union Membership Access Act which had nothing to do with the Act’s primary FOM issue. But it was included, saddling credit unions with PCA (RBC/CCULR) requirements in 2022 that NCUA cloned from the banking regulator’s rules.

Should credit unions individually or in certain circumstances believe additional share insurance coverage is desirable, options already exist. In Massachusetts, state charters must cover 100% of their savings. Amounts above the NCUSIF are insured by MSIC. In multiple other states, American Share Insurance offers additional coverage above the NCUSIF which credit unions can purchase. These are options credit unions can design to fit their own circumstances. NCUSIF insurance coverage is based on the principle that one size fits all.
If the recent banking failures cause a change to FDIC coverage, one of the factors is the market accountability publicly traded banks face. Market short sales can convert temporary problems into more serious runs. Credit unions do not have this market accountability. They also are not required to have the same public transparency required in SEC 10-Q and other filings for shareholders.

An Opportunity to Demonstrate the Cooperative Difference

For credit unions the debate on insurance coverage should be an opportunity to substantiate the differences and soundness of the NCUSIF, and its extraordinary record of success since 1984. Before that time, the NCUSIF did follow the FDIC model. As an FDIC financial twin over two decades, the NCUSIF never came close to achieving the legislative goal of a 1% fund. This was even after using double premiums, the only option available, for several years.

A major risk to credit unions is a NCUSIF-managed Fund without an awareness by leaders of its differences and why these matter. The changes requested by Chairman Harper not only abandon the explicit legislative guarantees made to credit unions in return for their perpetual 1% underwriting in 1984. It would most certainly entail more FDIC look alike regulations.

Here is Chairman Harper’s request to Congress this week:

If Congress does decide to act in this area, the NCUA has two requests. The first is to maintain parity between the share insurance provided by the NCUA and the deposit insurance provided by the FDIC. Share and deposit insurance parity ensures that consumers receive the same level of protection against losses regardless of their financial institution’s charter type.

And second, if coverage levels are adjusted in any way, there will be costs associated with those adjustments, such as the need to increase reserves. Accordingly, the NCUA requests additional flexibility for administering the Share Insurance Fund.

Specifically, the NCUA requests amending the Federal Credit Union Act to remove the 1.50-percent ceiling from the current statutory definition of “normal operating level,” which limits the ability of the Board to establish a higher normal operating level for the Share Insurance Fund. Congress should also remove the limitations on assessing Share Insurance Fund premiums when the equity ratio of the Share Insurance Fund is greater than 1.30 percent and if the premium charged exceeds the amount necessary to restore the equity ratio to 1.30 percent.²⁵

Together, these amendments would bring the NCUA’s statutory authority over the Share Insurance Fund more in line with the FDIC’s authority as it relates to administering the Deposit Insurance Fund. These amendments would also better enable the NCUA Board to proactively manage the Share Insurance Fund by building reserves during economic upturns so that sufficient money is available during economic downturns.

In sum, insurance parity is a false objective based on contradictory logic and a failure to understand the cooperative financial model. Credit unions should be careful what they wish for.

As one former NCUA Chair observed, the greatest threat to credit unions is parity.

May 12, 2023May 12, 2023

The OATH

Earlier this week I spent three days with Affinity Credit Union. I was invited to speak at their Annual Members meeting. This would be my first live, in- person speech in years, to a credit union with which I had no prior connection.

I asked to come a day early to learn about why this $140 million, 74-year state charter in Des Moines, IA wanted me to speak. The CEO’s response was simple: I want you to see what we do. In other words, for me to learn.

I accepted. In later posts I will share some of the things I experienced. But one event was totally unique. I had never seen it in my 45+ years with credit unions. It is an example that other credit unions should consider.

The OATH

The members’ meeting began at 5:30 with a buffet dinner for the over 200 people in attendance. The agenda was long running, from “A” to “Q” in the outline given with the Annual Report. There were three speeches by outside guests (I was one), six high school scholarships presented, recognition of three employees who had passed twenty-five years each in service all before the business portion of the meeting.

At the conclusion of the business meeting, the Chair Cindi asked all the newly elected and continuing directors to stand for their oath of office. The oath was administered by a former chair and director. He read the phrases and they would repeat together following him.

The oath begins with the words “do solemnly swear” and included the following commitments:

I will diligently, faithfully honestly and impartially perform the duties imposed upon me by the bylaws

I will not knowingly violate. . .any of their provisions

I further swear that I will. . .properly discharge the duties of any office or committee to which . . .I am appointed

I will not discuss the affairs of this credit union or any of its members wit anyone except credit union officials

I will give all possible assistance to any person who may succeed to any office which may hold. .

The nine directors stood together at the front of the room, hands raised, repeating the oath in unison before their families, friends and hundreds of members and guests. An important and solemn moment of a public commitment to their fellow owners and community.

The Oath’s Origins

As I had never heard about this happening in credit unions, I asked how it became a part of the Annual Meeting. Was it required in the bylaws? By their state charter? By some other tradition?

The practice had been followed long before the current leadership team was in place. Even prior to the former director and chair who administered the oath this year. He recounted:

It was given long before I got on the board. I was told that it was because it was swearing an oath to the local 310 members (the credit union’s original union chartering group at the Firestone plant) that they would take care of the credit union when it was members and family only. Local 310 still swears an oath to protect our brothers and sisters to respect and do no harm with actions or pen.

Unfortunately, in today’s environment not every union member thinks it’s necessary to swear an oath to watch out for each other. So it probably goes all the way back to the lunch box (when the credit union was chartered in 1947.) That lunchbox symbolizes a resource created by workers, for workers, that feeds families, futures and trust.

A Vital Example for Cooperatives

Vows, oaths or formal swearing ins are rare in organizations today. Perhaps when joining a church (statement of belief) or wedding vows or perhaps a pledge such as when joining the Boy Scouts.

There is however one universal practice where an oath is administered, when a person joins the military or becomes a federal employee. The constitution requires the practice as explained in this article:

The reason is simple – public servants are just that – servants of the people. After much debate about an Oath, the framers of the U. S. Constitution included the requirement to take an Oath of Office in the Constitution itself. Article VI of the Constitution says, “The Senators and Representatives before mentioned, and the Members of the several State Legislatures, and all executive and judicial Officers, both of the United States and of the several States, shall be bound by Oath or Affirmation, to support this Constitution . . .;

The author states the intent: One purpose of the Oath of Office is to remind federal workers that they do not swear allegiance to a supervisor, an agency, a political appointee, or even to the President. The oath is to support and defend the U.S. Constitution and faithfully execute your duties. The intent is to protect the public from a government that might fall victim to political whims.

Should Credit Union Directors Swear an Oath?

As volunteers, directors are often seen as an eleemosynary activity, an act of charity. Therefore the demands of a director should not be the same as in a formal, paid position of responsibility.

This characterization is even noted in federal legislation as recently as the Membership Access Act in 1998. In setting the new PCA reserve requirements, the legislation directed that the NCUA consider the volunteer nature of credit union leadership when imposing capital standards.

I believe that an annual oath taking in front of members and community, would not only be good practice, but honor and enhance the tradition of credit union volunteer leadership. The requirement could be made a standard part of the bylaws, which is the governing document, as noted in the oath above.

As a public event following the business meeting, it formalizes their accountability to the members whose authority has elected them to their positions.

Most critically the oath taking represents a transparent commitment to one of the most important tenents of cooperative design: the democratic member voting process. It reaffirms the trust members expect and are properly owed by their elected directors.

If you would like to receive a full copy of the Affinity Oath, contact Kris Laufer at klaufer@affinitycuia.org.

May 4, 2023May 4, 2023

NCUA’s Organizational Growth and Google’s Example

1982 was a consequential year for NCUA, credit unions and the future of the cooperative system. The Penn Sq bank failure occurred in July. The NCUA board approved the total deregulation of shares in April, and there were multiple credit unions with 208 assistance trying to turn around. The agency’s new leadership implemented a complete reorganization to become more effective.

NCUA’s 1982 Annual Report described these events and Chairman Callahan’s explanation for the redesign of the agency’s structure.

“The third area I want to report to you is decentralization because I think that ties in with regulation. We had a very strong Central office, a very talented Central office and one that was developed over time for a very good reason.

As I viewed it, it had become so talented and strong that the very mundane operational things that our field people tried to do got caught up in this pipeline—this pipeline of talent and centralization in Washington.

Seldom did things come out in a very efficient manner. Everyone was overdoing their job so we found that decentralization was the answer.

We found it necessary to cut the size of the Washington office by a third, to re-channel these resources to the field and to delegate to the regional directors the responsibility of using these resources in a timely way to get the exam cycle down to an annual one, to give backup and information to the field examiners, and to make those decisions on-site that involve safety and soundness, chartering, and supervision.”

The most important decision in the Agency’s management of its personnel was to reverse a five-year trend of increasing numbers of personnel in the Washington office and to reallocate. positions and personnel to the field. (Page 43)

More Growth-Limited Office Time

Today NCUA’s central office continues to expand in numbers and new departments. The budget continues to increase as the number of credit unions falls. Moreover even with the Covid emergency over, the agency requires D.C. personnel to be in-office only two days per pay period.

Is now time to reevaluate NCUA’s organizational trends? And accountabilities?

Many companies, non-profits, and other civic organizations including credit unions are adjusting their corporate structures. News reports of layoffs are daily events. One analysis in particular caught my attention about the reasons for Google’s layoffs. Here is an excerpt with examples very similar to patterns in DC:

A lot of tech workers were hired to do nothing: I’m not happy about anyone losing a job. But among the tens of thousands laid off from big tech companies, some people are coming out to admit that they did literally nothing at their jobs. . .

Meanwhile, now that bosses are accustomed to all their mid-level remote employees who never come to the office, they’re realizing that the jobs can actually be super remote, like maybe in Bangladesh.

In order to get promoted to senior levels (starting from director up) your organization needs to look a certain way. There are boxes you have to tick including having the right people at the right levels underneath you.

The long term approach to this would be to grow your people and that this will naturally happen if you’re working on things that matter. The trouble is that this takes time and you’re never more than 6–18 months away from a potential reorg that might make you start again from scratch. Ambitious people also tend to be impatient. So, what do you do?

You start vanity projects and hire. You hire in people at the right job levels so your organization has the “right” shape to it. You chase after vanity metrics about you looking good like active users rather than how useful your product is. You use your authority to subvert the promotion process so that your promo candidates get through even if they don’t deserve it.

You avoid performance managing people out because every headcount matters in your quest to make the next jump. You step back from confronting your peers over toxic behavior because you need their support for promotion. Eventually your cargo cult gets you where you want to go.

Another reason that Google is wasteful is that it’s too easy. The people inside it don’t see it as a business as they don’t have to struggle against the market forces everyone else has to deal with. Why would you when ads is so profitable?

This complacency means senior leaders often follow their personal agendas above all else. Empires rise and fall. Too often I saw that personal ambition trump doing the right thing for users, the business or employees.

The root cause is the leadership because it’s their personal ambition over running their part of Google like a business. I’ve seen people promoted to VP based on a set or vague promises they haven’t delivered, mass hiring and vanity metrics. Google can go to great lengths to protect people in senior leadership positions way beyond what they would do for the rank and file.

Et Tu NCUA?

May 1, 2023May 2, 2023

Credit Union Learnings from the Costs of Regulatory Mismanagement

With this morning’s announcement of First Republic Bank’s failure and subsequent sale to JP Morgan, the total cost to the FDIC of the three recent bank failures is approaching $35 billion.

The banks will pay for these losses through greater FDIC insurance premiums. That additional bank expense will be passed on to their customers. There is no government tax money being used.

I believe there are important initial lessons from these current failures for credit unions:

Regulatory mismanagement is extremely costly. The institutions and their customers will pay for these shortcomings.
The initial response will always be to issue more regulation-in this case both capital and liquidity requirements.
The problem is “bureaucracy,” not individuals with responsibility in the agencies.
All of the explanations offered below have been part of NCUA’s own playbook in the past.

The question for credit unions Is whether NCUA is exempt from the internal bank regulatory shortcomings described below? Or is it that the problems have yet to surface?

Regulatory Self-examinations

Before today’s announcement of this third failure, last week the FDIC, FED and GAO had issued preliminary postmortems of why SVB and Signature banks had failed. The headline summaries of these reports signaled the “self-criticism” of the agency’s performance.

However before turning the spotlight on themselves, the reports pointed directly at the banks’ management, from the Wall Street Journal’s account:

The Federal Reserve report — commissioned on March 13 by Michael Barr, vice chair of supervision at the Fed — argued that SVB failed on March 10 because of “a textbook case of mismanagement by a bank,” and said its senior leadership “failed to manage basic interest rate and liquidity risk.”

The FDIC report — authored by chief risk officer Marshall Gentry -– offered similar criticisms about the management of Signature Bank, which was seized by regulators on March 12. The FDIC said that Signature Bank failed to prioritize good government practices and often ignored FDIC advisory recommendations prior to its sudden collapse.

“The root cause of Signature Bank’s failure was poor management,” the report said. “[Signature Bank’s] board of directors and management pursued rapid, unrestrained growth without developing and maintaining adequate risk-management practices and controls appropriate for the size, complexity and risk profile of the institution.”

The obvious political and accountability question is why weren’t the regulators up to the task of effective oversight of these “basic risk”management failures. The reports then become more self-focused as reported in the Journal:

“Federal Reserve supervisors did not fully appreciate the extent of the vulnerabilities as Silicon Valley Bank grew in size and complexity,” Fed regulators said, adding that “when supervisors did identify vulnerabilities, they did not take sufficient steps to ensure that Silicon Valley Bank fixed those problems quickly enough.”

The two federal regulators also pointed the finger at themselves for failing to adequately supervise both institutions, and emphasized that new guardrails must be put in place to stave off another regional banking catastrophe. Both agencies said they missed weakness in both banks prior to their collapses, with the FDIC blaming a lack of staff to conduct targeted reviews of Signature.

The Federal Reserve’s Mea Culpa

Michael Barr, the Fed’s vice chair for supervision, issued a 114 page analysis. Here are some of his summary findings in his short introduction:

Our first area of focus will be to improve the speed, force, and agility of supervision. As the report shows, in part because of the Federal Reserve’s tailoring framework and the stance of supervisory policy, supervisors did not fully appreciate the extent of the bank’s vulnerabilities, or take sufficient steps to ensure that the bank fixed its problems quickly enough.

Higher capital or liquidity requirements can serve as an important safeguard until risk controls improve, and they can focus management’s attention on the most critical issues. As a further example, limits on capital distributions or incentive compensation could be appropriate and effective in some cases.

We need to develop a culture that empowers supervisors to act in the face of uncertainty. . .

Last, we need to guard against complacency. More than a decade of banking system stability and strong performance by banks of all sizes may have led bankers to be overconfident and supervisors to be too accepting. Supervisors should be encouraged to evaluate risks with rigor and consider a range of potential shocks and vulnerabilities, so that they think through the implications of tail events with severe consequences.

Oversight of incentives for bank managers should also be improved. SVB’s senior management responded to the incentives approved by the board of directors; they were not compensated to manage the bank’s risk, and they did not do so effectively. We should consider setting tougher minimum standards for incentive compensation programs and ensure banks comply with the standards we already have. . .

This report is a self-assessment, a critical part of prudent risk management, and what we ask the banks we supervise to do when they have a weakness. It is essential for strengthening our own supervision and regulation.

The Journal’s analysis of Barr’s report: “Of the four top takeaways about the events leading to SVB’s collapse, three are tied to perceived shortcomings with the Fed’s banking oversight. The report focuses on errors by the agency but not on individuals’ responsibility.

The Fed also pinned some blame on its own bureaucratic structure. Authority for overseeing banks is parceled out to the Fed’s regional bank branches, but in practice, the central hub in Washington provides extensive input and must approve some enforcement actions.”

“Self-assessments-A Critical Part of Risk Management”

Over two years ago, one of NCUA’s board members requested a “look back” on the NCUA’s analysis and response to the corporate resolution. A response was promised. Nothing has been done, at least publicly.

Regulatory failures are costly. Is the credit union system and its oversight subject to similar the bureaucratic shortfalls as the FDIC, Federal Reserve and OCC?

To retain, or recover, confidence in its own analysis, the Fed’s report includes details of its examiners’ findings, board presentations and other verbatim accounts of its oversight. Transparency is the first step in accountability and trust. That is certainly a model NCUA could emulate.

April 25, 2023April 25, 2023

University Student Entrepreneurs Win–but Credit Union Charter Still Distant After Six Years

The current generation of students is attracted to business and social startups. Many major universities now offer competitions encouraging students to design and launch new business and non-profit ideas.

These efforts are so widespread that there are now multiple rankings of the leading programs at colleges and universities across the country. Here is one showing the top 20 competitions.

One of the leading forums is at George Washington University, here in DC. The results of its annual New Venture Competition were just announced.

In their 2023 contest, 417 participants spread across 161 teams participated. Judges awarded $357,200 in prizes, including $163,000 in cash to the winners.

Twelve finalists received a minimum of $5,000, across four tracks: Business Goods and Services, Social Innovation, Consumer Goods and Services and Healthcare and Life Sciences Tracks.

Participants represented nine of the 10 GW schools resulting in a diverse range of innovative startup solutions.

GW President Mark S. Wrighton commented on the outcome: “If this is an indication of the next generation of problem solvers, then we are all in good hands. It is extraordinarily impressive to hear about the diverse set of new businesses.”

The full profile of all winners in all five tracks and their ideas can be seen in this listing.

A Credit Union Winner

In April 2018 three GW freshman from different academic schools devoted much of their first year in college to this competition. They reached the finals and were awarded $10,000 to continue implementing their project.

Their new venture proposal was to charter a credit union for the GW students and community. I recorded their five minute “pitch” on my iPhone from the audience.

Their words provide the promise that every credit union offers including the need and importance of financial literacy, member ownership and direction, online delivery, better rates, and strengthening the community with a firm “run by students for students.” Their slides are in the background on stage.

https://www.youtube.com/watch?v=s_xCpDe9a3U

(https://www.youtube.com/watch?v=s_xCpDe9a3U)

What Happened?

Dozens of students volunteered their time to complete the charter application, the group raised over $100,000 in donated capital and recruited an experienced advisory board of credit union professionals and GW faculty.

NCUA has twice rejected hundreds of pages for the charter applications. The agency has requested updated market surveys, revised financials, and numerous other shortcomings, all the while hinting that more capital would be desirable.

Meanwhile the three freshman who devoted a significant part of their college career to this effort have graduated; however two still serve on the advisory board. New student volunteers have persevered to carry on the founders’ original concepts.

NCUA has not assisted but rather stalled this six- year effort.

This status occurs despite the words in the February 28 presentation by NCUA’s Vice Chairman, Kyle Hauptman at this year’s CUNA’s GAC conference:

Our society isn’t the best at getting people to save and invest. This is where credit unions come in, with financial literacy and savings programs that improve their members’ financial wellness.

Financial wellness can save relationships. Financial wellness is a great product that we only buy if we value it more than all the cool ways to spend money. Credit unions help people achieve financial wellness. . . Financial issues can be a dry topic, but it’s not about the money itself – it’s about living your best life.

My three personal priorities for my term are:

Revamping the de novo chartering process. . .

I’ve good news on all three fronts.

On the issue of de novos, we’ve revamped and streamlined the chartering process. We will be rolling out a provisional credit union charter that fixes the chicken & egg problem, whereby a potential credit union wants to get its initial capital from a CDFI but can’t get that capital until we’ve issued them a charter. Still, we wouldn’t issue the charter until that credit union has the capital.

I’m proud of these improvements – I think it’s a part of facilitating true financial inclusion. I love seeing announcements about new charters. . .

Except this streamline chartering process does not exist. When asked about this “improvement” and the “provisional credit union charter”, there is no response. That effort, like credit union chartering, is stillborn.

Instead of supporting the next generation’s startup energy and goals to serve their community via coops, the NCUA is teaching potential supporters about the age-old witticism, “I’m from the government and here to help you.”

Apparently even board members cannot accomplish their priorities. How can de novo credit unions overcome the bureaucratic obstacles that even NCUA’s leadership is unable to move forward?

New credit unions are an endangered species. The future of the coop system is at risk. Not because the billion dollar segment which manages 75% of assets will disappear.

Rather it is because this generation of student entrepreneurs is unable to overcome government impediments. The result is that these motivated, creative individuals will find their opportunities for the benefits presented in the “pitch” above through other creative organizations. I suspect they will be called FinTechs.

April 24, 2023April 24, 2023

A Prophetic Voice

Last week I asked if credit unions today needed a prophet’s wisdom. I was motivated by one of C-Span programs which presents recordings of historical speeches by leaders at important moments in American history.

Hearing the original voices of leaders summoning their listeners to action still inspires today. The experience is both fruitful and edifying.

The reason is that the truths contained within these appeals transcend time. They are not merely words that endure in time, they are words that are beyond time. Their underlying truths do not change with circumstance, nor are they changed by it.

The actions called forth do not merely meet the challenge at a moment in time; they are the standard by which time itself is tested.

The paradox is that the timeless is always timely. If it is timeless and, if it’s always true, it is always relevant.

The Context for Chairman Callahan’s 1984 GAC Address

The 1980-1982 economic crisis was over. Interest rates and inflation were in back to single digits. Deregulation was well underway. Credit union growth and financial performance led all financial institutions.

The NCUA’s DC bureaucracy had been reorganized to reduce central office roles and put the six regional directors in positions of administrative leadership. The CLF had been capitalized in partnership with the corporate network so that every credit union had access.

There was a common commitment by the cooperative system to support expanding credit unions services to all Americans through new charters and increased FOM options on the 50^th anniversary of the Federal Credit Union Act.

But there was one institutional innovation still needed to solidify an independent and sound cooperative system. This was the primary topic of Chairman Callahan’s 1984 GAC presentation.

He called on credit unions to “Finish the Job.” Here is a recording of that request which which is 12 minutes following CUNA President, Joe Cugini’s brief introduction.

https://www.youtube.com/watch?v=1UcXPyUMtic&list=PLfsu0zcct30-jB6oqaROWiXhaJ6xTBuLd&index=2

(https://www.youtube.com/watch?v=1UcXPyUMtic&list=PLfsu0zcct30-jB6oqaROWiXhaJ6xTBuLd&index=2)

The call was answered. Today the NCUSIF is still the example of insurance that has stood the test of time.

April 3, 2023April 3, 2023

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.”

March 27, 2023March 27, 2023

A Former Fed Regulator On Reasons for SVB Failure

A segment from the March 14, Marketplace daily report on NPR follows. The interviewer is host Kai Ryssdal and the guest commentator is Daniel Tarullo who teaches at Harvard Law School.

Between 2009 and 2017, Tarullo was on the Federal Reserve Board of Governors; specifically, he served as oversight governor for the supervision and regulation committee.

Silicon Valley Bank (SVB) analysts are looking for situations where there are balance sheet or business model parallels that could lead to more bank failures. Tarullo asserts that management will always be first in line when blame is assessed.

However that is not the full story. He believes the proximate cause is closer to home–a regulator with a light touch.

I believe his last comment highlighted below describes NCUA’s approach to supervision. How else do you explain a credit union CEO and Chair giving themselves a $10 million fund under their sole control or $1.0 million dollar credit union CEO bonus upon merger, among other abuses?

Interview Excerpts:

Ryssdal: All right, so look, that’s why we got you on the phone. You ran, among other things you did at the Fed, the committee on supervision and regulation. And I am not the first person to ask, nor will I be the first person to ask, where were the regulators? Why did this come out of the blue?

Tarullo: That’s a huge question, isn’t it? There are two places to look: One is to supervision and the other is to regulation. Now, of course, we’re stipulating that there’s a management failure, but I think everybody would agree with that. So in terms of the government, the debate publicly has been, “Gee, were the 2018-2019 changes in the [Dodd-Frank] law and Fed regulations respectively to blame?” And, as I think you know, I was opposed to both the [rollback of the] law and the changes in the regulations.

But I don’t think there’s that direct of a connection between those specific changes and Silicon Valley. And so what that tells us is the failure was in the oversight by supervisors — people who were supposed to be watching whether things like the proportion of uninsured deposits was creating some unusual risks for that particular bank.

Ryssdal: That’s not terribly reassuring, I gotta tell you.

Tarullo: No, it’s not. And I think that the review that the Fed has launched — and it’s significant that it’s headed by the vice chair for supervision, Michael Barr, who is, you know, relatively new — I think the significance of having him run that rather than staff is precisely because they want to find out where the supervisory failures lay. Were they with the specific team that had responsibility for Silicon Valley? Or were the failures more widespread in the sense that Washington was providing kind of a light touch supervisory direction to them?

Ryssdal: What do you think?

Tarullo: I suspect that it’s a combination of the two. But given the signals that the Fed was sending, you know, in the last several years, I believe that part of it is just the “don’t be too tight in your supervision, you need to find legal problems before you tell the banks to change what they were doing.”

March 22, 2023March 22, 2023

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.

March 21, 2023March 21, 2023

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.