Needed: More Inter-coop Marketing Alliances

A response to my post last week on Marketing: A Critical Credit Union Advantage promoted a broader view of the situation.
Leo Sammallahti, Marketing Manager for the  Coop Exchange in Finland suggested a different framework.   Specifically he believes coops serve individuals who would have a natural interest in knowing about other cooperatively owned business.  Here is his idea.
I’m not familiar enough about credit union marketing in the US, but have some thoughts more generally about marketing within coops.
I recently talked with a friend who helps run a food co-op. He mentioned that they have 2000 people on their email list. A while later, another friend told me about a retrofitting (housing) coop that is raising money through an equity crowdfunding campaign.  The UK has a special financial instrument called “community shares” tailored for coops to raise capital through crowdfunding.
I believe there is an opportunity for a simple website with a directory of coops (in communities or a state) that want to promote other coops through their email lists. I sent a survey to 10 small and medium sized (SME) coops asking if they would like to promote other coops in their email list. Every single one of them said yes.
This interest caused me to realize this is an advantage coops have in marketing – coops (at least small and medium sized coops) want to promote each other.
Had I sent a survey to traditional publicly owned stock owned firms asking  if they would like to promote other businesses because those businesses have stockholders, they would have found the question absurd,  “Why would I do that?”
My suggestion is that the platform allow co-ops to make different type of arrangements to promote each other in their email lists. They can set up cross-promotions (I promote you if you promote me) and “cross promotional circles”–I promote another co-op every month in my email list and my co-op gets promoted in another co-ops email list every month. In addition, they can  require the coop to put out a coupon code or some similar special offer for them to promote.
What’s the relevance to credit unions in the US?  Not sure, yet. But if we create an ecosystem of many coops promoting each other, that can be powerful for credit unions as well. The US credit union movement has over 100 million members.  Credit  unions communicate via newsletter or social media regularly.
If they would systematically promote other coops in their messaging, and other coops would systematically promote credit unions, this could a create virtuous cycle.
From the point of view of a customer, when they become a customer of one coop and receive their communications, those  would include promotions of other coops. As a result, they learn about other coop possibilities and could become patrons.
This effort  could be more even more practical if regulations that limit investing in coops and promoting such investment opportunities were more encouraging.
Once the market for coop financial funding in an area reaches a critical mass, it could possibly lead to common funds that enable ordinary people to make recurring, low-cost, passive, diversified investments across small and medium sized coops.
This community investment evolution is being developed in the UK and could be a model for the US. Here is a recent report:  Understanding a maturing community shares market – new report | Co-operatives UK

Time to Be Weirdos Again: A Cooperator Reflects on Leading a Cooperative

Today, Randy Karnes passes the CU*Answers CEO’s reins to Geoff Johnson after twenty-seven years as the cooperative’s leader. The CUSO has reached new heights by every performance criteria in these three decades. Most importantly it has created a novel network business model combining the unique advantages of cooperative design with the strategic opportunities enabled by technology.

This interview is part of a longer conversation in CUSO Magazine, which I encourage you to read in full. Randy’s insights, beliefs, contrarian style, and enthusiasm are all captured in this dialogue.

The following selections reflect these qualities. I believe his observations are relevant for all credit unions today and as far into the future as we can hope.

What Drew You to CU*Answers?

What really drew me was that CU*Answers was a manufacturer—of software, of copyrights, of solutions, et cetera— and as a manufacturer, we have a different perspective than a retailer. Now I don’t have a problem with retailers. Walmart’s an excellent retailer, but when you go over to Walmart, you’re selling somebody else’s bubblegum. Being a manufacturer and having that creative opportunity was big to me. And that was exciting here. I’m not sure I would have come if it was a co-op and just a retailer. Retail is a very valuable business, but that’s not at the core of who I am.

 What have you enjoyed the most about being CEO at CU*Answers?

Well, I would have to say the collaboration and the cooperation to have a customer-owned business and the chance to make that concrete and real. Because the truth of the matter is being a cooperative is such a subjective thing. What is a customer-owned business? How does a customer-owned business work differently than a traditional business? What does it mean to be so transparent that you would tell your client everything? What does it mean to really worry about the client’s agenda as your own?

Co-ops are not just about building a business to sell things to people. They’re also about building a business with people who buy your things. In a co-op the concept is you share everything. You don’t hide any of your pimples, any of your wrinkles, any of those kinds of things—both sides work together just to improve. Most of the time businesses avoid inconvenient truths. Our business model is to share inconvenient truths as much as we share happy truths.

So, the constant evolution in a cooperative environment was such a challenging business problem. To me, it became the most rewarding thing we worked on. There are tactics and there are strategies. Anyone can be good at designing a platform or technical solutions. Anyone can do that or sell that. The missing ingredient is when you say you’re going to build a cooperative with your customer. And not just market it, but make it real—that’s a daunting challenge.

You’ve seen a lot during your tenure–what has surprised you the most about the path our industry has taken?

I’m truly surprised by how easy our industry has given up its differential. Today’s credit unions are wonderful. They’re doing great things and they have a lot of capability. But I feel that they’ve lost sight of their uniqueness and the way we do things. We’ve allowed our vocabulary to merge with banking. We’ve allowed our way of motivating consumers to be too close to how banks motivate consumers. The world is just merging wonderful differences into a gray blob, and I thought that some of the credit unions out there would have fought that with all their might.

So how do you think credit unions should go about fixing that, to keep from becoming one big, homogenous blob?

We have to start focusing and searching on what needs to be truly different, not just truly successful. Let’s say someone says to me, “You’re different, but you’re never going to be a success.” Well, if I’m different, maybe I’m already a success. I’m not just doing it like the next person, I’m not just giving into status quo, I’m not becoming part of the lowest possible denominator. I’ve got a spark. I’ve got something new.

We need a bigger focus on saying we’re different, and not just saying it, but proving it. You can’t just say you really love people. Everybody loves people. You can’t say you give good service. Everybody gives good service. We’re going to have to find a unique differential. Many of the places that I eventually got invited in to, they invited me because I was a weirdo and I spoke differently. Maybe it’s time for credit unions to be weirdos again.

His comments about future plans and more truisms are in the complete interview. You can access it in today’s issue of CUSO Magazine.

Harper’s Senate Confirmation Hearing:  What will his tenure mean for credit unions?

Probably no prior Senate confirmation hearing for an NCUA Chair has had a candidate with as documented a track record of actions and beliefs about credit unions, agency priorities and the cooperative system’s role versus banks as Todd Harper.

Readers can view the nomination hearing tomorrow, September 30, starting at 10 a.m. on the Senate Banking, Housing, and Urban Affairs Committee’s website at

Harper’s direct NCUA experience extends from February 2011 through January 2017 when he served as Director of Public and Congressional Affairs and Senior Policy Advisor to both Chairs Debbie Matz and Rick Metsger.  He was nominated by President Trump to serve on the NCUA board in February 2019 and sworn in on April 8, 2019.  President Biden designated him as NCUA chair on January 20, 2021.

The following are excerpts from speeches, writings and events during his time at NCUA as senior policy advisor and NCUA board member.

Harper’s desire to emulate the practices of the FDIC and banking regulators is clear.   He believes credit unions should be on a “level playing field” with banks.

His policy positions show a questionable grasp of cooperative purpose, their institutions and credit union history.

His  leadership priorities are based on dystopian forecasts creating the need for ever expanding governmental regulation  and oversight.

On Confidence in the Credit Union System’s Future

At June 2019 board meeting:   With the recent inversion of the yield curve, we know that a recession is coming, we just don’t know exactly when and how severe.

December 2019 OpEd in CuToday:

We know that a recession is coming. We just don’t know when and how severe it will be. That’s why we should fix the roof before it rains by implementing this rule (RBC) at the start of 2020. 

February 2021 speech to the DCUC after becoming chair:

As the COVID-19 pandemic rages on, we must smartly, pragmatically, and expeditiously address the economic fallout within the credit union system. To that end, when I first became Chairman, I issued my Commander’s Call to the agency.”

August 2021 DCUC speech:

But, I must caution everyone that we are not out of the woods just yet. Credit union performance will continue to be shaped by the fallout from the pandemic and its financial and economic disruptions. With pandemic-relief efforts like supplemental unemployment benefits, foreclosure prevention programs, and eviction moratoriums coming to an end, many households could face financial stress in the coming weeks and months. This could lead to higher delinquency and charge-off rates and potential losses for credit unions — and even failures.

September 2021 Board meeting:  But, nevertheless, we ultimately should expect delinquencies and charge-offs to rise in the months ahead, and all credit unions should pay careful attention to their capital, asset quality, earnings, and liquidity. To protect the Share Insurance Fund — and, ultimately, taxpayers — against losses, the NCUA needs to stay on top of these emerging risks and problems in the credit union system.

Harper’s modus operandi when presenting the credit union’s system’s outlook is to focus on risk, uncertainty and fear.

His continual dour forecasts remind one of economists who have successfully predicted ten of the past two recessions.

Harper’s view of the system’s resilience to economic change is so overtly negative, it leads one to ask if he has any confidence in credit unions or the agency’s supervision competencies.

Planting a Risk Story with the WSJ

Credit Unions Ramp Up Risk

Lenders Loosen Lending Standards, Increase Exposure to Longer-Term Assets  By Ryan Tracy June 5, 2014

This article in the Journal was revealed as an NCUA sourced effort by a credit union blogger who obtained a copy of an internal NCUA email celebrating its online publishing.

This PR misinformation effort occurred at the same time NCUA had to withdraw and rethink its first risk-based capital RBC rule proposal.  Over 2,050 comment letters (the most ever on a rule) were submitted, all with substantive criticism.

As a result, the agency backed off and said it would make significant changes in what became the RBC-2 proposal.

Forecasting a future of doom and gloom or hyping a present crisis is unfortunately an all-too-frequent regulatory temptation. Predicting negativity creates an aura of expertise.   It elevates the power of the regulator.  Crises enable overreach of authority.

There is no downside to predictions of future problems  by regulators.  If nothing happens, then the warning worked.  Everything turns our OK and no-harm-no foul for an erroneous judgment.  If there is a down trend, then one can claim prescience and proven expertise about the future.

This regulatory “banging the drum” PR effort with the WSJ was when Harper was in charge of NCUA’s Public and Congressional Affairs office.

On the NCUSIF’s Financial Sufficiency

Harper’s August 2021 letter to Congress recommending legislative changes to the fund’s design included:

  • Increase the Share Insurance Fund’s capacity by removing the 1.50 percent statutory ceiling on its capitalization.
  • Remove the limitation on assessing premiums when the equity ratio exceeds 1.30 percent, granting the NCUA Board more discretion on the assessment of premiums; and
  • Institute a risk-based premium system.

These recommended changes, if enacted, would allow the NCUA Board to build, over time, enough retained earnings capacity in the Share Insurance Fund to effectively manage a significant insurance loss without impairing credit unions’ contributed capital deposits in the Share Insurance Fund, thus avoiding situations like the one that led to the creation of the Corporate Stabilization Fund during the last financial crisis. Moreover, these changes would generally bring the NCUA’s statutory authority over the Share Insurance Fund more in line with the statutory authority over the operations of the FDIC’s Deposit Insurance Fund.

In this June 2019 board meeting exchange with Larry Fazio, Harper conflates FDIC’s premium-based insurance system with the credit union’s 1% cooperative deposit underwriting model.  One doesn’t have to read between the lines to see where Harper would like to go with this 1% deposit asset:

Board Member Harper: Great. What percentage of the Deposit Insurance Fund can banks count as an asset on their books?

Larry Fazio: None.

Board Member Harper: None. So banks don’t count it. They have to write their premiums off as soon as they pay them, correct?

Larry Fazio: Yes.

Board Member Harper: In comparison, are credit unions allowed to consider any part of their assessments as an asset on the books?

Larry Fazio: Assessments, no.

Board Member Harper: How about their Share Insurance Fund?

Larry Fazio: So when they make a contribution to true-up the 1 percent deposit of insured shares, they count that as an asset.

Board Member Harper: But wouldn’t they keep 1 percent on their books and we technically only have 0.38 percent these days?

Larry Fazio: The 1 percent is the deposit and then –

Board Member Harper: So they keep some on their books and don’t have to charge it off, Larry, is the point I’m getting to.

Larry Fazio: Yes, but we don’t call those assessments.

On a Level Playing Field with Banks

In addition to seeking FDIC-like options for the unique NCUSIF, Harper frequently references bank regulation as the basis for similar credit union rules.  When commenting on a proposed combination rule to clarify the process for credit unions buying banks he stated:

The National Credit Union Administration Board recently proposed a rule that would guide credit union purchases of bank assets and liabilities. The proposed combination transaction rule is an important proposal and worthy of consideration. However, it exposes an important gap in the supervision of credit unions — former consumers of the acquired banks will not have the same level of consumer financial protection oversight in their new credit union. 

The Federal Deposit Insurance Corporation supervises many of the banks that are part of these deals for consumer compliance. That agency has a consumer compliance program that is more robust than the NCUA’s program.

Harper’s core defense of the agency’s RBC rule is because the banks did it–although they subsequently dropped the requirement.  Here is his plea for a level playing field:

Why should it take complex, federally insured credit unions with $500 million or more in assets seven or eight years longer to implement their comparable risk-based capital rule than it took for banks and thrifts to implement theirs? That’s an uneven regulatory playing field.

The risk-based capital rule brings us under BASEL, and provides comparability with other federal regulators as required by Federal Credit Union Membership Access Act.  And,

If banks didn’t get their RBC rules delayed, I have to ask myself why should credit unions? 

On Small Credit Unions

In December 2013 the NCUA Board passed in a 2 -1 vote a rule that would prohibit credit unions operating from homes.  Harper was Chairman Matz Senior Policy Advisor at this time.

The regulation’s stated goal: “the proposed rule intends to ensure all FCUs operate in a manner consistent with modern-day expectations for insured financial institutions.” The term “modern-day” was not otherwise defined.

Chairman Matz told the Credit Union Times in an April 7, 2014, article: “Times have changed, and financial institutions have changed as well and if you are stuck in the past, that means you are not growing, and you are not serving your members well and they would probably receive better services from a different credit union.”

The rule’s premise was based on inaccurate and misleading facts as noted in this critique: “NCUA asserts home-based credit unions are “stuck in the past,” but the fact these credit unions have an average charter length of 55 years and have survived the Great Depression, World War II, the Vietnam War, and the Great Recession tells a more meaningful story.”

On Transparency and Credit Union Input

Prior to the July 2015  House banking subcommittee hearing on NCUA,  CUNA noted: “it’s been six years since the last time NCUA held a hearing on its budget.”

In questions to the NCUA Chair, a committee member described the agency’s duplicity in providing information to the committee, misuse of FOIA to redact documents and failure to post the agency budget for public review.

Chairman Matz deflects all these “mistakes” to staff. When asked if it might be helpful to have direct credit union input and communication on the Agency’s budget, Matz replied, “it would not be effective.”

Excerpts of the hearing can be seen here with senior policy advisor Harper sitting behind  chairman Matz.

On Exaggerating Past Crises 

People tell stories about the past for the present in order to influence the future.  NCUA is especially good at creating these historical re-interpretations.

In the March 2021 NCUA board meeting staff provided “background context” to the 2008-2009  corporate crisis.  Presenters opened by stating there was a $50 billion difference between the book and market value of corporate investments at one point in the Great Recession. They proclaimed that if the agency had let those corporates fail, then this “loss” would have caused thousands of credit unions to also liquidate.

That possibility was never an option, but a wonderful hypothetical to justify any and all subsequent actions. In fact the agency’s auditor estimated the collective corporate TCCUSF potential deficit at yearend 2009 as $6.9 Bn in the opinion released in early 2010.  That proved to be much too high as well.

By dramatically magnifying risks of prior events, NCUA avoids addressing its mutual supervision and examination responsibility for these situations. By hyping potential prior losses, the need for more regulatory resources and unilateral action  is re-justified.

Harper continued with this fictional recreation in the September 2021 board meeting by making the potential disaster even greater:

As I recall, during the last financial crisis, had Congress not acted to create the Temporary Corporate Credit Union Stabilization Fund, we would have had to immediately write down 69 basis points of the one-percent capital deposit. That write-down could have led to a cascade of losses as credit unions trued up their capital deposits with the Share Insurance Fund only to have other credit unions getting into trouble and another true-up occurring.

Although publicly supported in an open board meeting, the NCUA has done nothing to review the corporate resolution: its actual causes, options considered and actions taken upon their liquidation.   In 2010 NCUA estimated the corporate resolution costs to credit unions between $13-16 billion.  To date over $6.2 billion in surplus has been earned by the five corporate liquidated estates (AME’s).

Rhetorical banging on past and future  “risk drums” is an unfortunately tempting political tactic.  It helps concentrate power in a democracy or in an independent regulatory agency.   When those in authority say things are either bad now or bound to get worse in the future, it legitimizes the exercise of arbitrary power, new authority and assessments for more resources. Due process and public comment is often forgotten.

On Financial Regulators and Climate Change

Todd Harper said “financial regulators, like the NCUA, have a responsibility to foster resiliency to all material risks to financial institutions, including those related to climate change. By measuring, monitoring, and mitigating such risks, the NCUA can fulfill its core obligations of maintaining the safety and soundness of credit unions, protecting consumers, and safeguarding the Share Insurance Fund.”

Temperament and Leadership

Changing one’s opinion when presented with conflicting evidence is one of the most valuable skills of the 21st century.  This is not an attribute demonstrated in Harper’s NCUA roles.

A useful example of Harper’s personal style and argumentative logic is from the June 20, 2019 board meeting when he interrogated NCUA staff about the agency proposal to extend the implementation of the RBC rule until January 1, 2021.

The full 120 minute board meeting can be viewed here.  Harper’s questioning begins at approximately 50 minutes in and lasts almost 70 minutes to the end.

The entire discussion of RBC is very helpful, but more relevant now is seeing Harper’s posturing as a minority board member.   He challenges and is condescending to staff.   He uses all of the bank comparisons referenced above to support his position.   If the answer to a question doesn’t fit his thesis about the urgency and impact of RBC, then he moves on, ignoring the answer.

If this is his approach as a minority board member, what will his manner be as Chair?  Will he compel staff to suborn their professional judgments to present hypothetical future failures or align with  policy views which lack factual foundation?

Two questions highlight this hectoring style. He asked staff if RBC would have lessened the impact of losses to the NCUSIF during the Great Recession, not including the corporate problem.  Fazio replies any impact would have been marginal. Harper ignores the undermining of his position.

A second issue which he brings up repeatedly are the insurance costs from credit unions liquidated due to taxi medallion losses.  Here are just two examples:

Board Member Harper: Great. And how effective was the current risk-based net worth rule in mitigating losses at the taxi medallion credit unions that recently failed?

Larry Fazio: So the answer to that question is that the risk-based net worth requirement, while it would require those institutions to hold more capital than the leverage ratio, those institutions held levels of capital well in excess of that requirement. And even with those high levels of capital still failed.  And again,

Board Member Harper: Sure. Did the current rule, the one that’s in place right now, provide adequate protection against losses at the taxi medallion credit unions?

Larry Fazio: It’s a judgment call. I think that’s a case of they – again, they held – so I mean, let’s put a little context around that. It was a situation where the value of the collateral declined precipitously and in a material way; I think a 90 percent decline in value from the peak. The cash-flows of the revenues that the borrowers could generate was materially affected by changes in the marketplace. And so when you had that confluence of events, even an institution with as much as almost 50 percent capital – net worth – couldn’t survive that. So –

Board Member Harper: You’re essentially describing an asset bubble, correct?

Larry Fazio: An asset bubble combined with a disruption in a market. And so, yeah…

There is much irony in Harper’s repeated use of the taxi losses to argue for immediate RBC implementation.   During the entire period of the taxi medallion disruption, Harper was the senior policy advisor to the two chairman who led the agency as  these credit union portfolios declined in value.

His repeated efforts tying this episode to the RBC discussion could be seen as a way to disassociate from his responsibility at the agency when these failures developed.  Was the wolf at Harper’s door as this $765 million loss developed and he failed to notice?

As a policy priority, Harper’s singular emphasis on capital in this June 2019 inquisition as the sine quo non for credit union soundness is extremely myopic.

There will always be failures.  That’s why there is a regulator and insurance-recapitalization fund. The only way to stop failure with 100% certainty is to make things so restrictive that NCUA regulates players out of existence, which some claim is occurring now.  Credit unions manage risk, not avoid it.  It’s too costly to avoid it 100% of the time.

Harper asserts in the meeting that a handful of outliers (5)  require a policy the masses must adopt.  A policy to address the outliers would be a more effective tool, a point Fazio makes several times.

Moreover, lessons were learned during the Great Recession and credit union underwriting has changed.  History is not repeating itself today. Risk today is more tied to collateral  than concentration.

There is current industry data from over two decades that reinforce why 7% is more than adequate as a minimum standard for well capitalized.  Outliers should be supervised with “outlier expertise;” the overwhelming majority of the industry has shown it can operate at a level that has stood the test of time.

Where Will Harper’s Positions Lead NCUA and Credit Unions?

This 70-minute harangue from the June 2019 board meeting shows Harper’s authoritative, even badgering manner.   His confuses historical facts and shows no recognition of the most basic differences between cooperatives and banks.

For example, credit union equity-capital is only from retained earnings.  Whereas bank capital includes numerous options including various categories of stock, qualifying subordinated debt plus retained earnings.  Even with this differences, Harper asserts the two system’s capital comparisons must be the same.

His confusion about the different financial systems, equating the cooperative credit union model’s  purpose with banking is an analytical and factual failing that leads to policy positions completely at odds with credit union history.   His frequent use of bank/FDIC examples unmoor his regulatory priorities from the world of cooperatives.

One result is that he is completely silent on critical issues confronting the system today.  These include the absence of democratic governance by members, the self-serving mergers of well capitalized credit unions, the hidden terms negotiated when credit unions buy bank assets, the complete absence of new charters, and the lack of any joint agency-industry efforts to develop new approaches for the CLF, to support MDI’s and to respond to new technology.

His focus is solely on the power, resources and authority of the agency.  When over 97% of credit unions are rated CAMEL codes 1 and 2 and capable of providing innovative solutions to strengthen the cooperative system, the agency is absent from this dialogue.

Credit unions have successfully navigated two of the country’ worst economic downturns over the past dozen years. Industry analysis suggests that the system is overcapitalized.

What is missing is regulatory leadership willing to encourage and celebrate the self-help role and financial independence many Americans seek from their member-owned cooperative.

Why Risk Based Capital Is Far Too Risky

The article below is an op-ed in the Wall Street Journal by the then Vice Chairman of the FDIC, Tom Hoenig in 2016.

In 2019, the FDIC replaced its RBC requirement with a simple leverage ratio.  Banks are no longer required to calculate or report it.

In July 2021 NCUA Chair Harper proposed a new rule to implement both the RBC rule, passed 2 to 1 in 2015, and an entirely new leverage option with a minimum of 10% to be well capitalized.  This new minimum is 43% higher than the current well capitalized, PCA-legislated standard of 7%.

As presented in the FDIC Vice chair’s editorial, RBC has no objective validation.   To impose this failed standard of capital adequacy on credit unions, would be a most onerous burden–with no documented benefit.

Hoenig states the correct approach to setting capital standards is: Regulators, relying on research and historical experience, requir(ing) investors to provide a minimum pool of capital to hold against a broad base of assets. 

NCUA’s proposed capital twins of RBC and CCULR are based on neither research nor historical experience.  It is a simply an edict imposed over unanimous industry opposition without any documented need.

His article is reprinted in full below:   

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

By Thomas M. Hoenig

Aug. 11, 2016 7:21 pm ET

The risk-based capital system that was long used to judge the resilience of the world’s largest banks has been highly unreliable and contributed to the 2008 financial crisis. In its aftermath, the leverage ratio is used more actively and in conjunction with the risk-based measure as an important constraint on leverage. But as banks seek to bolster short-term returns, this leverage constraint is having an impact and the largest banks and some policy makers are working to undermine its role and return to the system that failed.

Under the risk-based system, regulators, and in some cases the banks themselves, assign weights to different classes of assets in a portfolio based on their calculated guess about future risks. This guess then defines how much capital should be held for each asset. Investors also look on these risk weights as an endorsement of financial safety.

But as we learned from the crisis, this measure too easily allows banks to conceal risk and amplify leverage. For example, regulators endorsed low-risk weights on subprime mortgages and highly leveraged mortgage securities before 2008 and banks then piled into these toxic assets, eventually causing havoc across the banking system.

Despite its failed record, the risk-based system is still pitched as a cure for slow economic growth. The Clearing House Association, a trade group for large banks, said in recent congressional testimony that a risk-weighting system is the only reliable way to judge bank capital. It condemned as “very inaccurate” the main regulatory alternative of a simple leverage ratio, which measures capital to total assets without applying different weights.

This is incorrect. The leverage ratio has proven most reliable principally because it does not pretend to judge future trends in asset quality. It simply measures how much loss from total assets a bank can withstand before it fails. When a bank is under stress, this is all anyone cares about.

Member countries of the G-20 are expected soon to propose weakening this capital standard further, even as some countries and their banks are vulnerable to financial and economic stress. While the largest U.S. banks have increased capital since the crisis, their capital is still lower than the industry average and inadequate for bank resiliency. Undermining the leverage ratio is not the direction we should allow these banks to go.

Let’s look further at the financial and regulatory record. The preponderance of independent research, including by the International Monetary Fund and Bank for International Settlements, demonstrates many of the weakness of the risk-based capital measures that contributed to industry problems. Risk-based capital schemes encouraged banks to use their financial engineering tools to increase leverage and reported returns associated with artificially low risk-weighted asset classes. Low weights were assigned to subprime mortgages, foreign sovereign debt, collateralized debt obligations and derivatives like credit default swaps. These asset classes ended up dominating the banks’ balance sheet, leading to massive losses. Unfortunately and surprisingly, these risk weights have changed little since the crisis.

Banking requires that managers be responsible for defining the business strategy, determining risk tolerance and analyzing assets. A risk-based capital scheme designed by regulators denigrates bank management’s responsibility. It inflates the role of regulators in allocating bank capital despite their poor record. It ignores that regulators are too slow to change risk weights as financial circumstances change and too often influenced by political agendas. (emphasis added)

While assigning risk weights may be useful when testing the quality of current bank assets under different performance assumptions, it has not proven a reliable means to allocate the placement of assets safely and productively onto a bank’s balance sheet. Regulators are no better than anyone else in predicting emerging risks.

A risk-based capital system makes bank regulators a partner with management in assigning risk weights, creating moral hazard by making regulators culpable when risks are misjudged. This makes it more difficult for governments to let the largest banks fail because they have had a hand in that failure.

As of December 2015, the largest global banks reported that on average only 45% of their assets carried risk. This is wrong on its face as it misleads the public by treating more than half of the assets of global banks as if they were risk free.

By comparison the leverage ratio is more useful. Regulators, relying on research and historical experience, require investors to provide a minimum pool of capital to hold against a broad base of assets. Management must then balance earnings goals, liquidity needs and appetite for risk—and make lending decisions accordingly. Regulators then use supervision and stress tests to judge a bank’s financial condition and the adequacy of its capital, holding management accountable for sound banking practices and performance.

Mr. Hoenig is vice chairman of the Federal Deposit Insurance Corp. and former president of the Federal Reserve Bank of Kansas City.

Can Elections Indicate an Organization’s Relevance for its Members?

What is your impression of a non-profit that has five open board seats out of 15 total directors, and received 33 nominations for the positions?

That is the status of the board election now underway at Inclusiv.  The incredible interest from credit union members certainly suggests a dynamic, responsive and relevant organization with which people want to engage.  All the nominees are shown on the website with candidates for open seats from states in Region I and for at-large seats, from across the country.

Here is how Inclusive described this moment when announcing the board election openings:

This is a historic moment for community development credit unions. As a result, Inclusiv is experiencing a time of unprecedented growth, with over 400 member credit unions. This is the largest membership in the history of our organization! Much of this growth has been fueled by the increasing number of credit unions committed to financial inclusion and racial equity. 

Inclusiv is seeking passionate, committed and thoughtful candidates for its Board of Directors. This is a truly unique opportunity to join the industry’s leading voice for Low Income designated, CDFI certified and MDI designated credit unions.

New Name and Expanding the Mission and Role

Inclusive is renamed from the former National Federation of Community Development Credit Unions. Its mission is the same: helping low- and moderate-income people and communities achieve financial independence through credit unions.

I would also suggest that Inclusiv’s example is more than supporting this segment of the credit union system.   When leadership roles in any organization are so attractive that 33 nominees vie for five open seats, it is a demonstration of members’ excitement and interest in the firm’s purpose.

In your credit union’s last election, how many members were nominated for open seats?  Was an election even held?   If you could somehow ignite this enthusiasm with your members clamoring to volunteer as directors, what would that say about your credit union’s standing with its owners?

Inclusiv’s election contest may be more intense than their leadership anticipated. However it is also testimony to the courage and foresight of the CEO and board that are facilitating this participation in democratic governance.




“The Best Damned System in the Country”

NASCUS members’ Annual State Summit meeting  begins today.  It includes a “fireside” chat with new NCUA Chair Harper.  Hopefully this dialogue will be enlightening.  For two of his recent proposals pose an existential threat to the dual chartering system.

The first would fundamentally alter the legal framework of the unique, cooperatively designed NCUSIF, by removing all the guardrails on expenditure.  Harper defends these changes by reference to the FDIC, a premium based fund that has failed repeatedly since the NCUSIF 1984 redesign.

The second Harper initiative is a new three-pronged capital structure for all NCUSIF insured credit unions.  Some credit unions would be allowed to follow the current risk based net worth (RBNW) model. Others would be required to follow the 2015 risk based capital (RBC) rule, yet to be implemented.  A third group of so-called complex credit unions could elect a new CCULR ratio that would raise their well-capitalized requirement by 43% from the current 7% to 10%.

All of these capital changes would take effect on January 1, 2022, or in five months, if Harper is able to get a second board vote.

The End of Dual Chartering

Aside from the lack of any substantive basis for these proposals, the outcome would effectively end the dual chartering system.   Risk based capital would throw a single regulatory blanket over every asset and liability decision made by an NCUSIF insured credit union.

NCUA would be the single hegemonic regulator for all coop charters. This single lens for risk evaluation would create a homogenous cooperative balance sheet.  Instead of increasing safety and soundness, if this uniform approach to risk analysis is wrong, it could lead the cooperative system over a cliff.

The One Sure Defense: Choice

This prospect of NCUA dominance was foreseen decades ago.   The following is a timely and timeless reminder of this threat in a speech by former NCUA Chair Ed Callahan in 1986.   The excerpt of these remarks to the Association of Credit Union League Executives is under three minutes.

“The insurer is the regulator.  The system only works when there are choices.”

An Era of “Regulatory Backlash”

America’s credit union museum has begun an oral history series of recordings about critical events in the 110 years of the movement.

Episode 16, my contribution, is in two parts.   Part 1 tells the story of deregulation.   I described this approach as a pragmatic response to the disruptive economic and political forces changing many areas of American enterprise in the late 1970’s:

“Deregulation was not a political ideology, strategic blueprint or onetime response to a changing economy.

In credit unions it was nothing less than building a better system of “cooperative credit in the United States.” It turned upside down the practice of government making everyday business decisions for credit unions.

Rather that responsibility was now in the hands of those closest to the members-management and boards.”

Callahan’s Calling Card

In part 2, I recall the reasons Ed Callahan gave when asked why he was leaving the NCUA Chair with over two years remaining on his term. One was to help credit unions take advantage of the opportunities provided by deregulation.

In founding Callahans, the firm’s first effort was to establish a database of all US credit unions.  In 1986 this became the source for the first and only annual Credit Union Directory. Volume 36 was released this past quarter.

This data resource became the multifaceted Peer-to-Peer database and software that is the go-to, most advanced analytical tool for understanding the industry today.

The Ending of an ERA

Part 2 discusses the ending of this fourth chapter of credit union history–deregulation–in 2009 as the Great Recession financial crisis occurs.  Each of these four ERA’s is approximately a generation long.

While the following 25 years have yet to be fully lived, I suggest the initial decade’s dominate activity could be described as a time of “regulatory backlash.”  The mutual regulatory-industry approach to change and response to disruptions was ended.  NCUA emphasized its “independence” from the credit unions and undertook a series of unilateral regulatory initiatives to re-regulate and impose greater restrictions on multiple areas of activity.

When an NCUA Chair today testifies before Congress that his oversight North Star is FIRE, the cooperative system has been put on notice.  The Chair is just one board vote shy from throwing credit  unions into the pit of regulatory damnation.

The presentation is 22 minutes.   I refer to both recent history and current topics such as mergers, the idolization of size, and the ever-present temptation to become “bank-lite.”

Whatever name sticks when the current 25-year chapter is closed, I trust reviewing these initial years of NCUA activity in the light of prior ERA’s experiences will be educational.


The Moral When Answering Life’s CALL

Most people believe their life has a purpose.  In John Calvin’s theology every person’s work is a responsibility assigned to him by God.

So in the Presbyterian Church’s Calvinist doctrine of occupational calling, becoming an ordained pastor is a response to this belief. Here is one pastor’s story of the experience, with a moral.

“It was late Spring 2011. Adrian had graduated from Princeton Seminary, our student housing had expired, and I was still in the process of finding a job. Maewynn was 6 months old. We sold nearly everything we owned, even my beautiful Camaro (some people thought it wasn’t “car-seat friendly”), and packed up what little we had left on the top of Adrian’s parents’ hand-me-down Toyota Corolla and headed west. We were moving back in with my parents in California.

We were making good time. Every morning I checked the oil and made sure we had water and food and diapers in the car. Every morning except, of course, for one fateful morning. We wanted to visit Devil’s Tower and get all the way to Cody, WY, an 8+ hour drive, that day. We left early. The car was running rough. We stopped in a small town in Wyoming and asked for a garage. The mechanic looked at our Toyota with a sneer: ”Don’t do imports.” We pressed on.

The oil was leaking, I was sure of it. There were no towns now, just 360º of grassland and cows in the shadow of the Big Horn Mountains. We had run out of water. And diapers. We made it down a big hill, and coasted to the top of the next before a sickening mechanical noise whined from under the hood, and the car came to a dead stop. We were alone with the wind.

I grabbed my flip phone – one bar of service! I called the number for AAA. There was a town only 35 miles away! We waited thirsty, hungry, and alone. Our shining knight came an hour later in a tow truck, missing three front teeth. We were elated.

I held baby Mae in one arm as I tended a stress-induced bloody nose with the other, and we rode in the tow truck.

At Stan’s Auto Body we got the bad news: the engine block was cracked and our car was totaled. The nearest car rental was 40 miles away in Sheridan. I called the Avis at the regional airport there: “I’m sorry, hon, but we don’t have any one-way rental cars available. Oh, and don’t bother calling the Hertz, I answer that phone too.

Somehow we ended up at a Mexican restaurant, and I looked at Adrian and said, “We will be no more than 24 hours in Buffalo.

Then my phone rings. It’s Agnes Schneider! Co-chair of the GPC search committee! “Rachel, we’d love to have you come down from New Jersey for a final interview for the job!

I’m a little farther than New Jersey at the moment, Agnes,” I said, and I filled her in.

Well, get to LA as soon as you can and we’ll get you out to DC.

We found a place to stay: a series of tiny log cabins run by a 7’ mountain man and his 4’6″ wife. The next morning we returned to Stan’s, and sold our car to Mike’s Bottom Dollar Auto. As we filled out the paperwork, the garage phone rang. A mechanic looked up and said, “It’s for you.

Hi, ma’am? It’s Cheryl from the Avis. Turns out we have a Malibu that needs to get back to San Francisco. You can rent that if you can get to Sheridan today!

Bottom Dollar Mike, may God bless his soul, loaded up all our worldly possessions in his gigantic Chevy truck and drove us the whole way. We loaded up the (Chevy) Malibu and finished the trip. I flew out to DC and was offered the job as Director of Christian Ed. at Georgetown Presbyterian Church. The rest, as they say, is history.

Pastor Rachel

P.S. The moral of the story is: I should have kept the Camaro. ”

A question for readers:  When telling your call’s story, what will be the moral?

PSS:  Rachel has a new future as the SeniorPastor of Capitol Hill Presbyterian Church in DC starting this month.


What Does It Mean to Declare a Business “Dead?”

One way to get reader’s attention is to declare some activity, celebrity, business or popular style “dead.”  No more growth.  The hype is over.  The transitory fascination revealed.

One widely published writer using this headline is Jared Brock ( who in January wrote a blog declaring that Uber and Lyft are Dead.

His essay focuses on the $200 million “dark marketing” campaign the delivery companies used to defeat proposition 22 in California which would have classified gig workers as full-time employees.

The Business Model Critique

After describing the ride-hailing services efforts to kill the new regulation, he also points out their “predatory” financial strategy which  is how others have characterized the firms’ business models:

Luckily, Uber and Lyft occupy a very precarious perch in the taxi universe. Like Airbnb, they’ve extracted a huge amount of value from their employees and stock investors, but what real value have they contributed in return?

If you strip it to the core, you realize the only thing any of these predator app companies actually do is build pretty-looking booking services and then weaponize colossal amounts of debt and private equity to strangle their competition, as while marketing the myth that they’re doing no harm.

 The Meaning of “Dead”

But Brock has another, more fundamental interpretation of “dead” than corporate demise.   More than a rapacious business model, it also refers to the absence of an underlying contribution to society.  He tells the story of returning to his hometown after years away. The main street is full of chains that have replaced the local shops, cinema, and restaurants.  He remarks:

And it hit me: this place is dead. Spiritually dead. Morally bankrupt. Worthless in all the ways that truly matter.

 That’s Facebook. That’s Instagram. That’s Airbnb. That’s Uber and Lyft and Robinhood. Predator companies, leaders in the menace economy. They create nothing, contribute nothing, mean nothing. They just take, broker, skim, flay. They’re dead in the future, yes, but also dead to me right now, and dead to a world that wants to flourish.

When People are Left out of the Calculation

Brock’s critique is that these companies leave people and their communities out of their business calculations. Gig, not full-time employees.  Rental housing, not owner occupied. National versus local solutions.

When challenged they follow the tactics one economist described as the menace economy:  “the pursuit of wealth at the expense of other human beings.”

Is there a Lesson for Credit Unions?

Time will tell if this interpretation of dead accurately foretells the fate of Uber/Lyft.  Brock’s concern is broader than platform technology companies.  What happens when organizations become “spiritually dead, morally bankrupt?”

These are human failings, not limited to organizations built with new technology.  Companies can easily equate financial performance, market appeal or innovation with sustainable success.

Credit unions were formed with a different focus: does what we do benefit our members?

Recently I received the following member assessment of a pre-pandemic merger of two strong, long-serving credit unions:

I have found no personal benefit in the combination of the two organizations.

 The employees I hear from are frustrated in numerous ways and lack a sense that their jobs are still secure. 

  I attended the virtual Annual Meeting . . .A highly scripted meeting seemingly meant only to satisfy the requirement to hold it.  Incumbent board members were re-elected by acclimation as there were no other candidates on the ballot.

 I am keeping a checking account open but transitioning other relationships over to another credit union.

 There are numerous examples of well-capitalized credit unions merging to benefit  executives or using members’ accumulated reserves to buy out bank owners.  Several very large credit unions have even adopted the fintech model of just an online platform, few or no branches. The token rhetoric for these initiatives refers to corporate growth, technology advantages and/or diversification goals, not member value.

Is the future of credit unions these cooperative merger combinations within, bank asset purchases from without, or the total embrace of digital-only?  Is it possible these options are merely the last hurrah of credit unions that are already “dead”?



A Response to: Do Small Credit Unions Matter?

My June 2 blog ended with this hope:

Two factors suggest this decline in small credit unions can be addressed.

The places of economic disparities and need are as numerous now as any time in our history.  The human spirit of solving problems and the values of cooperatives align with many seeking to bring change for a more equitable America.

From Great Britain came this response, used with permission:

Your published pieces are forwarded to me across “the pond” by a valued co-operative credit union sister at American Airlines Credit Union Ltd.

The last sentence of your piece of 2nd June is a killer blow – a killer blow that spells out the co-operative credit union difference: “The human spirit of solving problems and the values of cooperatives align with many seeking to bring change for a more equitable America.”

Our leaders, both lay and professional, should “do” because they want to, not because they “must”.  Our leaders at all times must think “we” and not “me”, must be humble “servant” leaders and not imperial ones.

As shapers it’s our role to prospect for, discover, encourage and develop those folks regardless of their histories, as most often they will have talents and gifts that we have not got, nor ever had!!


Barry Epstein, M.IFT, I-CUDE

Co-Trustee – ICULD&E Foundation/Director ICULD&E Co.Ltd

Awards Office – “Edward Filene” & “Joe Biden” Credit Union Awards for Excellence

Act Local-Impact Global

As in many areas of life, America’s example for good or otherwise, has implications beyond our borders.  The world is watching how our cooperative financial system responds to today’s members as a unique component of the globe’s largest capitalist economy.