Category: Observations

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The Only Threat to Credit Unions

At a time when many credit union leaders see NCUA board members announcing new regulatory agendas in virtually every speech, it is helpful to remember this counsel from a former NCUA Chairman:

“The only threat to credit unions is the bureaucratic threat to treat them for convenience sake, the same as banks and savings and loans.  This is a mistake, for they are made of a different fabric.  It is a fabric woven tightly by thousands of volunteers, sponsoring companies, credit union organizations and NCUA-all working together.”

 Source:  Chairman’s letter: NCUA 1984 Annual Report

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President Obama Speaks to Cooperatives in Canada

A CONVERSATION WITH PRESIDENT BARACK OBAMA

The Nova Scotia Co-operative Council in celebration of their 70th anniversary have teamed up with presenting sponsor Atlantic Credit Unions and a grouping of other sponsors to host “A conversation with Barack Obama” in Halifax at the Scotiabank Centre in Halifax.

Wednesday November 13, 2019  6:30pm

$115 – $325

The web site reports the 9,000 seat auditorium was sold out almost immediately.  Now that’s an eye-opening brand impact!

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Pick Your Number: What Risk Based Capital Looks Like Today

Corporate credit unions have labored under a very detailed risk based capital rule (RBC) for almost eight years. At the end is a footnote from a corporate’s audit showing the reporting required by the rule which demonstrates four very different outcomes:

  1. Leverage ratio
  2. Tier 1 risk based capital
  3. Total risk based capital ratio
  4. Retained earnings as % of capital

As of December 2018 these ratios range from 6.26% (leverage) to 44.07% (total risk based). These single numbers actually simplify the multiple ways the ratios can be presented by using different ways to calculate the average asset denominator.

Two other columns show the regulatory minimum ratios to be considered “adequately capitalized” or “well capitalized” under the rule..

There are a total of 12 numbers for a reader to compare to evaluate a corporate’s capital status at a point in time—before undertaking any trend analysis.

With a range of outcomes from 6.26% to over 44% as indicators capital sufficiency, one must ask if the numbers have any meaning at all.

The Delay in Risk Based Capital for Natural Person Credit Unions

In June the NCUA board approved a two-year delay in RBC rules for credit unions. Among reasons given was consideration of yet another leverage rule for complex credit unions in addition to PCA. That would make the rule more complicated, not less.

As shown by the bank regulatory agencies and even more clearly by the corporate RBC rule, the outcomes are so complicated that the data fails to clarify any dimension of capital adequacy; for example does this corporate have  too much or too little capital?

It is a tool that confuses, adds burdens and ultimately locks credit unions into a legally-mandated assessment of relative risk among all asset categories.

Natural person credit union balance sheets are many times more complex than corporates whose balance sheets are almost all investment securities. These all have relatively easy market based values for referencing.

Risk based approaches are not only confusing, they can also tilt credit union decisions to increase exposure to whatever the regulatory “safest” relative  risk of the day might be.

The simple leverage ratio has served the industry well for over one hundred years including more than 50 since deregulation. RBC might be useful as a tool; but it could potentially drive credit unions off a cliff if it were to be a rule.

CORPORATE FOOTNOTE 11 – REGULATORY CAPITAL

The Credit Union is subject to various regulatory capital requirements administered by the NCUA. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Credit Union’s financial statements. Failure to meet minimum capital requirements would require the Credit Union to submit a plan of action to correct the shortfall. Additionally, NCUA could require an increase in capital to specific levels, reduction of interest, and ceasing or limiting the Credit Union’s ability to accept deposits.

The Credit Union’s actual and required ratios for December 31, 2018 and 2017 are as follows:

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The Real Capital Powering Credit Unions

In a recent podcast interview by Robert McGarvey, CEO Randy Karnes summarizes CU*Answers’ approach to strategy. On more than a dozen business issues from culture to market analysis, his concise insights are extraordinary.

At a time when supplemental capital for credit unions is a topic of regulatory review and wide industry interest, his comments on the CUSO’s approach to financial soundness, especially capital planning, are especially relevant.

As he explains, for his CUSO patronage by the owners is more valuable than dollars of capital. The reason is that patronage is “belief, persistence and cash flow.” Capital dollars have to be paid back. Patronage sustains and grows.

The Message for Credit Unions

All of the proposed approaches to supplemental capital will need to be paid back. The real “capital” that has been the source for all credit union’s soundness from day one is the member relationship. Member loyalty, use and trust are the patronage that sustains viability even if net worth ratios fall below well-capitalized.

The reason for 208 assistance in the FCU Act is to allow members to “recapitalize” their credit union over time through their patronage. When PCA or other supervisory actions prevent members and management from recovering from setbacks, the fundamental strength of the cooperative model is compromised.

Almost all credit unions active today, were founded without financial capital. Their financial success is created over years or even decades of member participation.

When the success or status of a credit union is measured by only financial yardsticks, sooner or later, that framework will be found wanting. It overlooks the fundamental difference between a member-owner cooperative and a for-profit financial alternative.

The message for credit unions from this CUSO’s 50-year history may be that all financial capital is supplemental. Longevity requires relationships. That is the cooperative difference and unmatchable advantage.

To listen to Randy’s 34 minute interview by Robert McGarvey’s CU 2.0 Podcast , Episode 47, visit: https://www.buzzsprout.com/268738/1513849-cu-2-0-podcast-episode-47-randy-karnes-cu-answers-for-small-credit-unions

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A. Lincoln on Labor and Capital

A  Labor Day reflection:

In my present position I could scarcely be justified were I to omit raising a warning voice against this approach of returning despotism.

It is not needed nor fitting here that a general argument should be made in favor of popular institutions, but there is one point, with its connections, not so hackneyed as most others, to which I ask a brief attention. It is the effort to place capital on an equal footing with, if not above, labor in the structure of government. It is assumed that labor is available only in connection with capital; that nobody labors unless somebody else, owning capital, somehow by the use of it induces him to labor. This assumed, it is next considered whether it is best that capital shall hire laborers, and thus induce them to work by their own consent, or buy them and drive them to it without their consent. Having proceeded so far, it is naturally concluded that all laborers are either hired laborers or what we call slaves. And further, it is assumed that whoever is once a hired laborer is fixed in that condition for life.

Now there is no such relation between capital and labor as assumed, nor is there any such thing as a free man being fixed for life in the condition of a hired laborer. Both these assumptions are false, and all inferences from them are groundless.

Labor is prior to and independent of capital. Capital is only the fruit of labor, and could never have existed if labor had not first existed. Labor is the superior of capital, and deserves much the higher consideration. . .

Source:  State of the Union Address: Abraham Lincoln (December 3, 1861)

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Why the Appeals Court Ruling on NCUA’s FOM Rule Is Irrelevant

According to the US Census Bureau’s population clock, the estimated 2018 United States population (February 2018) is 327.16 million.

This is a bit lower than the 329.06 million estimated by the United Nations.

As reported in Pentagon FCU’s June 30, 2019 quarterly call report, every one in the US is eligible to become a member. The data submitted by  the credit union is as follows:

MISCELLANEOUS INFORMATION NUMBER ACCT
2. Number of current members (not number of accounts) 1,788,610 083
3. Number of potential members 329,152,485 084

 

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Face to Face: A Credit Union’s Irreplaceable Advantage

Our society seems intent on replacing human interaction with technology. In the independent Atlantic Baseball League, an experiment to automate the calling of balls and strikes is underway. The umpire still stands behind the plate but gets the ball or strike call via an Apple AirPod earpiece from a computer equipped with an artificial intelligence program.

Credit unions are deploying options so members speak to their phones or their home speakers, asking questions that were once answerable only by another human being. From account opening, to on boarding, to completely automated credit decisions, the race is on to take the human out of every conceivable member need and experience.

So what are the events that defy Google questioning and experiences we can only have through face to face interaction with another human? Answering that challenge is how credit unions will not only remain relevant but also define how each will compete no matter the asset size, number of branches or range of services. For what will be the cooperative advantage if people helping people simply becomes computer programs massaging each members’ data and responding based on software logic, no matter how intelligently designed?