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CLF: The One Thing Necessary

As of December 2019, approximately 1,468 credit unions with total assets of $1.4 trillion reported membership in the Federal Home Loan Bank (FHLB) system. These totals represent 27% of credit unions by number, and 88% of total assets.

By comparison, there were 278 credit unions that were Central Liquidity Facility (CLF) members holding $115 billion or about 7.2% of assets.

While numbers for Federal Reserve membership are not readily available, since NCUA requires by rule that all credit unions over $250 million be members of either the CLF or Federal Reserve, one can presume the overwhelming majority have opted for Fed membership.

Why this choice? If the Fed and CLF are both “lenders of last resort” why is the CLF deemed so unappealing? How is the FHLB system so much more relevant for credit unions then their own liquidity backstop?

NCUA’s Appeal for Credit Unions to Join the CLF

In its April 2020 meeting, the NCUA board approved final rules to make the CLF more attractive to join. Some changes were the result of the CARES legislation. They included opening membership to Corporates directly while changing their agent roles, expanding lending purpose, and increasing the borrowing multiple based on contributed capital from 12 to 16 times.

Rule changes eliminated the six-month waiting period after joining to borrow, the ability to withdraw membership upon demand versus the current 6-24 months delay, easing collateral requirements, and allowing corporates to borrow for their balance sheet. Staff also outlined improved loan processing capabilities.

The three Board members made individual appeals urging credit unions to join up now. They explained that the CLF, as now capitalized, could be inadequate to the crisis even at a multiple of 32 times member shares. NCUA could need liquidity for the NCUSIF and the Federal Financing Bank is the most reliable source for funding in a crisis.

The One Missing Element

The CLF is a “mixed-ownership government corporation” managed by the NCUA. The credit unions supply all the capital upon which total borrowing capacity is determined. Funding is direct from the government’s financing bank, unlike the FHLB system which raises its borrowings in the open market.

If the CLF is to be relevant in the future, the “mix” of the credit union and NCUA roles needs to be reassessed.

The historic agreement in 1983 for the corporate system to fully fund the CLF’s capital requirements for all credit unions  was ended by NCUA in 2012.  The NCUA failed to provide a design for the CLF to become an integral partner with its credit union members-owners.

In contrast today the FHLB system is credit union’s preferred lender because they are member-centric in their operations. Members buy capital stock to borrow in good times and bad; they elect the board, and individual banks proactively develop products and services to serve their various members’ needs.

The CLF has been used solely as a regulatory tool by NCUA. In the Great Recession, the primary borrower was the NCUSIF which forwarded $10 billion to the balance sheets of WesCorp and US Central. An effort designed by leading credit unions to create a “protracted adjustment credit” program for credit unions to refinance members’ mortgage loans became stillborn when NCUA staff took over the initiative.

Non Routine Borrowings to Resolve Problems

Credit unions seeking liquidity assistance will almost always be under some form of financial stress. This can be due to market dislocations making  assets difficult to value, unplanned share outflows, or earnings pressures from increased delinquency or  sound loan growth options.

By “normal” operating criteria, credit unions needing liquidity will be under financial strain and often under examiner constraints. Recent NCUA practice is not to provide workouts with problem credit unions via NCUSIF 208 and CLF assistance. Rather NCUA prefers to direct the credit union to downsize to fit its reduced capital ratio.  For contrast, this was not the policy when the CLF was used to alleviate the stress from the non-earning receivers’ certificates issued by the FDIC after the Penn Square failure in 1982.

NCUA has not sought credit union input for changes to better fulfill CLF’s legislative purpose to ”encourage savings, support consumer and mortgage lending, and provide basic financial resources to all segments of the economy.”

If credit unions are to be asked to fund the CLF more fully, they must be included in the conversation about the CLF’s future.

Reversing an Historic Catastrophe

At year-end 2011 and until October 25, 2012, the CLF was fully funded and covered all credit unions for membership. At the 2011 annual CLF audit, it had an estimated draw of $49.8 billion from the Federal Financing Bank. Total credit union assets at that time were $974 billion.

NCUA described events following the audit in 2012 in the annual report: “Neither USC bridge nor NCUA were able to secure the transition of USC’s products and services to a successor entity, thereby leading the Board’s decision to wind-down and liquidate USC Bridge’s operations as of October 29, 2012.

Accordingly, USC Bridge discontinued its role as the agent group representative for CLF and CLF redeemed USC Bridge’s capital stock on October 25, 2012. The result of the liquidation of the agent group representative is that as of December 31, 2012, CLF membership comprised solely regular members and no agent membership is in place.”

NCUA controlled both the USC Bridge and the CLF. NCUA unilaterally shut down the CLF’s thirty-year record of covering every credit union in the cooperative system.  

US Central was never insolvent when liquidated by NCUA.  US Central’s asset management estate (AME) today reports a positive balance of over $1.7 billion.

The Challenge at This Time

Two of the three current board members were involved in these prior events. Rodney Hood was on the NCUA board that conserved US Central in April 2009, even though solvent and fully reserved for losses. From February 2011 Todd Harper was NCUA’s Director of Public Affairs and senior policy advisor to Chairman Matz when the CLF’s comprehensive industry role was terminated in October 2012.

If the Board can learn from these previous events to again develop a partnership with credit unions about the role of the CLF, they will rectify one of the most unfortunate actions ever taken by NCUA.

Credit unions’ strength is their ability to collaborate, work for shared purpose and exercise patience when resolving problems. If the Board reaches out and listens, real change can be made in the next covid congressional package that will be coming down the congressional pike.

Such a re-design could make the CLF central to the future of the cooperative system and enhance the role laid out for it by Congress. That would be a tremendous opportunity in the current crisis to reverse a mistake from the prior one. Is the Board up to the challenge this time?

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Singing Affirming Community

The TV is filled with instances of persons singing during the pandemic. An opera tenor from his balcony in Italy; students from their dorms in Princeton NJ. Clapping, pot banging and yes singing, on the streets of New York for health care workers.

Singing comforts and transcends the moment. It creates and affirms the communities we all belong to. And it can inspire.

Down In the River

For Mennonites, music is integral to their religious services. Their a cappella four-part harmonies of familiar tunes effortlessly engage the listener’s full attention.

An example is this three-minute video recording of Down In the River.

The five verses invite first sisters (women singers) followed by brothers, mothers, fathers and finally all “down in the river” to pray. The swelling chorus walking to the stage adding voices and parts with each verse, repeats the same question. The white, plain headdress on singers and audience reinforces the simplicity of the music’s message.

Going IN the River

But how does going down IN the river relate to now? When uncertainty causes each person’s fate to be more contingent than ever, deeper questions of meaning arise. This reflective instinct is heightened when walking to water-streams, ponds, rivers, ocean fronts. There is a double meaning in the “reflecting pool” in front of Lincoln’s monument in Washington D.C.

In the opening pages of Moby Dick, Ishmael declares, “Yes, meditation and water are wedded forever.” Is covid-19 this generation’s white whale?

For me, this gentle folk tune invites us (show me the way) to go down IN the river and asks: “Who shall wear the starry crown” in this moment?

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Why Do We Walk Toward Danger

A college friend who became a doctor and author (pen name Samuel Shem) sent a message about his recent experiences at the NYU Grossman Medical Center. He was lecturing there on March 4th, caught the virus, and transmitted it to his wife. Both have now recovered.

Being on the front lines prompted him to reflect on why health service workers willingly take this risk. Day in and day out. Part of his thoughts follow:

“Why do we walk toward danger?” Treating hundreds of patients afflicted by this high-virulence pathogen is scary. Our contact with it can kill us. And we risk infecting our loved ones at home. . .

What brings out our best in horrific times is our connection with each other, our “being with.” The danger mobilizes our shared relationships and focuses our skill. In any of these good connections, we feel more energy, value and understanding of each other, more empowered to act, and a desire to connect again. We come out of these encounters more ready to “do the right thing” for patients, our team, and our selves. We might have felt that we could not go on for another minute, but then—in the connecting—our resilience and energy returns! Good connection makes good care. . .

This is what keeps us going through hard times like these. Simply put, it’s a shift to the “We.” Working together under this pressure brings forth the “we”—and then the “we” strengthens the connection.

Or as Navy Federal Credit Union headlined their annual report several decades ago: “Our strength is our union.”

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OIG Report on The FDIC’s Readiness for Crisis

Completed in 2019, the FDIC’s Office of Inspector General (OIG) reissued this report yesterday to assist in responding to the current crisis.

There are two takeaways that could help the credit union system.

The first describes how the FDIC performs self-evaluations of its performance in past crises. This process is summarized in the following paragraph for the Great Recession. To my knowledge, NCUA has never conducted any study of its actions in this event.

Two current board members were directly involved, at different times, in the implementation of the Corporate Resolution plan begun in 2009. The current surplus of over $6 billion from the five corporate liquidations, versus NCUA’s projected costs of $13-$16 billion, suggest the urgency of understanding how such a catastrophic supervisory misjudgment could have occurred.

Below is how the FDIC’s evaluated its role:

“Since its inception in 1933, the FDIC has responded to several financial crises in the banking system. In 2012 and 2017, the FDIC completed two Agency-wide studies of its response to the financial crisis of 2008-2013. These studies identified challenges that the FDIC experienced and addressed during the prior financial crisis, such as those related to staffing, contracting, and information technology. The studies also identified lessons learned and recommendations, some of which the FDIC has incorporated or planned to incorporate into its operations and crisis readiness planning. Such operational improvements have helped the FDIC continue to enhance its readiness for crises impacting insured depository institutions.”

A second benefit of the OIG report is the identification of best practices in crisis management. It evaluated the FDIC’s capability on each of these. These seven practices are listed as follows:

“The OIG identified that guidance established by the Department of Homeland Security and Federal Emergency Management Agency on planning for crisis events could be used as best practices by the FDIC. Additionally, best practices from non-Federal sources reinforce the concepts articulated in Federal best practices.

Our review of these best practices identified seven important elements of a crisis readiness framework that are relevant to the FDIC – (i) Policy and Procedures; (ii) Plans; (iii) Training; (iv) Exercises; (v) Lessons Learned; (vi) Maintenance; and (vii) Assessment and Reporting.”

The 73-page, reissued OIG report is available on the FDIC OIG website.

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A CEO’s View of the Current Moment

Every good CEO knows that what we are learning now is the foundation for new ways to EARN in the future. The key is to make sure we don’t waste the learning and the lessons thinking this is just a freak interruption to a template we wish to get back to.

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From the Field: What is a Credit Union?

“A Credit Union is a place to do your banking – we do loans, have checking and savings accounts, credit cards, mortgages, and other banking items. We are a not-for-profit cooperative financial institution, and operate like a bank except we don’t issue stock on Wall St. Since we don’t have to pay stockholders, we can use our income to provide lower loan rates, higher deposit rates, and do other things like reinvest in our community, give to charities, and keep our fees low for services. At NET Credit Union, we don’t have customers, we have members. Members have voting rights as to how the credit union operates. Our board of directors are volunteers – they don’t’ get paid to sit on the board. When you bank with NET, your money stays right here, local. There’s so much more you get when you bank on NET.”

 

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A Sunday Meditation for Our Time

With thanks to Mark Willey, organist choirmaster at Georgetown Presbyterian Church, Washington D.C.:

Martin Rinckart walked quickly down the filthy side street that led to his house, distracted only briefly by a hungry mob fighting over the body of a scrawny and very dead cat. He knew them all, had ministered to them, buried their children, and fed them what he could spare from his own meager rations.

Today though, he carried nothing but an idea, a poem that had come to him while he was conducting one of ten funerals he had conducted that day.a He needed to write it down before it was forgotten.

Opening his front door, he rushed to his small desk and picked up a goose quill pen. Dipping it into the well, his mind wandering over the events of the past year, as the tip slowly filled with iron gall ink.

He could see their faces and hear their cries of anguish. The weeping parents burying their only child, the grieving young widow, sick herself with only days to live. They were almost too numerous to count, but as the town’s only living minister and one of just three surviving members of the town council, it was his job to count. In that year alone, he’d buried over four thousand souls, their lives cut down by the Black Plague, but this was just the latest pestilence.

Ever since his appointment in 1617 as Archdeacon of Eilenburg in Saxony, he’d never known peace, or plenty. The skirmishes between the various Protestant and Catholic states had metastasized into an all-out war in 1618; a war that killed millions. Poverty, sickness, hunger, and death were ever present for Martin, and his life was devoted in service to those who suffered.

Lifting the pen from the well, he set its tip on the paper. The familiar scratching sound of its strokes quickened as the letters formed words, flowing into lines of poetry:

Nun danket alle Gott                               Now thank we all our God,
mit Herzen, Mund und Händen,         with heart and hands and voices,
der große Dinge tut                                 Who wondrous things has done,
an uns und allen Enden,                         in Whom this world rejoices;
der uns von Mutterleib                          Who from our mothers’ arms
und Kindesbeinen an                             has blessed us on our way
unzählig viel zu gut                                 With countless gifts of love,
bis hierher hat getan.                            and still is ours today.

 https://www.youtube.com/watch?v=skdWLWF6Ttw

It’s hard to imagine this hymn emerging from such a dark time: a plague, and famine in the middle of a thirty-year long war. Somehow, between all the burials, feeding the hungry, caring for the sick, and ministering to as many people as he could, Martin Rinckart found time, and a spirit of thankfulness to write these words.

Writing them didn’t put an end to the plague, or bring peace to Europe, but Martin seems to have discovered what a spate of recent studies are confirming: Gratitude is good for our minds and bodies.

Could we, would we write words like these today? The words of this hymn of thankfulness flow from Martin’s time to ours, to inspire us to live with a spirit of gratitude in the face of sickness, even the threat of death, and how to focus our energy on service, rather than fear. The world needs more Martins. I want to be one. Don’t you?

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In Case You Missed Spring: Nature Did Not

With all the world’s attention focused elsewhere, it is easy to overlook the calming rhythm of nature. A poem by Wendell Berry, “The Peace of Wild Things”, captures the life affirming repose of nature. Berry (born August 5, 1934) is an American novelist, poet, essayist, environmental activist, cultural critic, and organic farmer living in Kentucky.

When despair for the world grows in me
and I wake in the night at the least sound
in fear of what my life and my children’s lives may be,
I go and lie down where the wood drake
rests in his beauty on the water, and the great heron feeds.
I come into the peace of wild things
who do not tax their lives with forethought
of grief. I come into the presence of still water.
And I feel above me the day-blind stars
waiting with their light. For a time
I rest in the grace of the world, and am free.

Some of the life affirming beauty from our garden energized by a warmer than normal season.

Primrose:

Crocus:

Hyacinth cluster:

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Schools and Credit Unions Serving Communities Together

Under the US Constitution the primary responsibility for public education rests with the states, not the federal government.

The result is that K through 12 education is overseen by a fragmented system including local school boards, county level agencies and state departments of education.

Financially, approximately 90% of funding is from state and local taxes. The federal government’s share of education fluctuates between 12-15%.

Effective public education encounters all of the major issues of society: race, income disparity, immigration, technology access, financial resources and even political ideology.

The local school systems are a daily example of the major demographic, political and economic issues each community must deal with.

An Indicator of Economic Needs

Some credit unions such as NET Credit Union actively partner with school districts in their educational and outreach strategies.

Most credit unions today have community charters. One of the most useful indicators of the need for credit union services may be from the economic data provided about K-12 students.

Public information on each community’s K-12 student population is abundant.

Here are three examples of data points about the economic circumstances of students in the greater Washington DC area:

  1. In Montgomery County, Maryland, with 144,064 students, the percentage that have received free and reduced price meals (FARMS) is 42.4%.
  2. In Fairfax County, Virginia, with 187,000 students, the number considered economically disadvantaged is 34%.
  3. In the District of Columbia’s public school system of 94,503 students, 77% are considered economically disadvantaged.

These three school systems have some of the most affluent housing areas in the country and, due to government employment, some of the steadiest levels of employment.

Yet significant percentages of students are from families living in circumstances where the school system provides free meals.

Investing in the Next Generation of Members

School statistics can inform credit unions about the economic circumstances of local families especially those that are just be getting by. Financial education and access to reasonable credit is critical for lower income families achieving financial stability, if not independence.

Partnering with schools and students is a way to introduce the cooperative option to the next generation of members. Every community has a school system and most are under local control. A first step could be to ask the school board for the public statistics on their student’s economic and demographic trends. Then open a dialogue for how to reach those families who would benefit most from credit union service.

Forming a collaborative relationship with the single most important institution families’ consider when moving into an area, could give credit unions a long term partnership that enhance opportunities for those most in need.