Why Change? A Sentence from a Sermon

On Sunday June 14, 2002, Rev. William Barber III gave a 43-minute sermon to an empty Washington National Cathedral. He integrated events from American history to provide a context for his message: “America, accepting death is not an option anymore.”


One example of his literalness: In America you can find unleaded gas anywhere, but also cities where there is no unleaded water.

His use of historical facts provides a picture of America that was not part of any course I took. Be inspired.

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NCUA’s Mindset in Responding to Problems, Is the Problem

Every organization will experience problems. Some imposed by external events. Others by internal failures because all are run by imperfect human beings.

Internal performance shortfalls occur even with the strongest, well-documented corporate cultures: harassment, inappropriate comments, disdain for conflicts of interest, performance failures, improper expense claims or even showing up on time.

Unfortunately, the instinctive response by government is to spend more resources. Moreover, the situations are addressed in secret with no explanations or analysis, except for after the fact announcements of a “solution.” With no transparency, there is no accountability.

A classic example is NCUA’s approach is the response to the recent revelations of a corrupt General Counsel and an earlier IG report on questionable travel reimbursements for senior staff.

Throwing Money at the Issue

Instead of addressing issues head on, the NCUA Board reacted to the public revelations of these in-house shortcomings, by creating a new position: Chief Ethics Officer.

The salary range: $227,113 to $263,000 per year. However, this may be just the initial increased cost as the person’s duties include “direct(ing) the activities of the office, and assisting and advising subordinate attorneys and/or other staff on assignments”

A Leadership Failure, Not a Resource Problem

The Chief Ethics posting above also lists the follow requirements:

EXECUTIVE QUALIFICATIONS: you (must) possess all the executive qualifications listed below. (details omitted)

Leading Change.
Leading People.
Results Driven.
Business Acumen.
Building Coalitions/Communication.

These would be superb qualifications for a Board member. It is instructive that the Board did not believe these qualities existed within its own body or within the staff of the agency. One has to question whether these capabilities can be imported if they are not part of the culture.

Spending more resources when problems occur is a mindset that provides a façade but not real change. The “ethics issues” or other challenges will just come back in another guise. For effectiveness has to start at the top. It cannot be delegated. In most organizations it is called leadership.

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Let’s Put a Stake in the Concept of Risk-Based Capital

Like Dracula in a horror movie or Covid outbreaks, risk-based capital (RBC) keeps showing up on NCUA’s agenda.

It is again on this Thursday’s June 25th NCUA Board meeting. No details are provided, but hopefully this will be the decision to finally kill this burdensome, ineffective and most importantly, wrong-headed effort

Banking Regulators Repeal RBC

The most important FACT is that RBC does not work. Just ask the FDIC, FED and OCC which unanimously ended RBC requirements and all related calculations.

On September 17, 2019, the Federal Deposit Insurance Corporation passed a final rule providing community banking organizations under $10 billion in assets a simple, single capital standard. The new adequacy standard is the bank leverage ratio.

As stated in the press release: “The leverage framework will greatly simplify regulatory determinations regarding capital adequacy and eliminate the need for qualifying community banking organizations to calculate and report quarterly risk-based capital ratios in their Call Reports.”

Bankers Adopt the Credit Union Capital Adequacy Measure

This singular, clear banking capital adequacy standard is the same calculation credit unions have used in their 100 plus years of existence.

Since 2014 NCUA has brought this proposal forth, time and again. The final rule adopted, but implementation postponed several times, runs over 400 pages.

Credit unions have universally found fault and opposed it. One board member, McWatters, has questioned the legal basis for it. It will be important for Hood and McWatters to be aligned as board member Harper has defended the RBC rule in the face of all contrary evidence.

Now is the time to completely withdraw this totally flawed, burdensome and useless concept.

The banking regulators unanimously concluded there is no benefit, even in calculating the multiple ratios.

What more evidence does the Board need to end this costly effort? It has too long distracted NCUA and its examiners from the real work of helping credit unions better serve members.

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The Benefits of the Covid Crisis

The following are notes from the CEO’s comments and Chairman’s close at a credit unions” members’ virtual annual business meeting a week ago. The CEO summarized covid’s lessons to date:

  1. Interrupted what we were doing, gave us time to rethink priorities, reengineer the financials, and focus on strategy after coronavirus;
  2. Stay at home orders for our staff and members meant the virtual future anticipated in 2025 is here now;
  3. Our experience has given us renewed confidence we can endure in the future. Many of our younger leaders have not had to manage a crisis. This event makes them “battle-tried.”
  4. Crisis confirmed the advantages of being local. We are part of the community. We lead recovery with our example.

He concluded: This is the first national public health crisis for over a century We will document our plans to tell a winning story afterwards. More importantly, we are more prepared and empowered to confront the next unforeseen challenge .

Better Than Before

The Chairman closed the meeting by giving his future vision: Better Than Before. The pandemic required an immediate response of continuous innovation and improvement. He promised to sustain that momentum even when “we are standing on the other side” of this event.

What are your your credit union’s learnings at this phase of the crisis? Are you documenting actions to have a road map for the next disruption?

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Disrupting Cooperative “Trade Associations”

One vital advantage of cooperatives is intra-industry collaboration. A long-standing expression of this capability is credit union trade associations. They range from local chapters (largely extinct) to leagues to the national groups such as CUNA, NAFCU, NASCUS, NACUSO as well as associations focused on specific interests, e.g. the Defense Credit Union Council.

But as the average credit union grows in size, total institutions continue to decline and credit unions develop more in-house capabilities, what is their future?

Defending the Status Quo

Their actions during the crisis are instructive. They rush to convey the latest regulatory announcements; monitor congressional decisions to protect credit union interests; seek parity with other government agencies; and maybe even inject a long-standing narrow fix into the legislative agenda.

Most importantly they protect the sacred tax exemption even as they seek a credit union portion of various federal rescue funds.

Apart from insider expertise, trade associations’ political persuasiveness relies upon tens of millions of member-owners, not just 5,000 institutions. One looks in vain for the stories of credit unions’ unique role with members. Or how the tax-exempt reserves and cooperative capital are being deployed.

There is no future agenda being pursued. Just more efforts to keep “eyes open.”

Instead of championing cooperative reforms, especially for well-documented deficiencies in NCUA’s role, the industry is flooded with updates about what is happening, might happen, or will never happen in DC.

The Challenge

The membership and financial pressures on trade associations will only grow more urgent as a result of current events. The challenges are many:

  • How will trades adjust to a shrinking credit union base?
  • What if credit unions see little value in political advocacy or value it so much it becomes an in-house capability?
  • What is their value as a showcase or gateway for vendors to credit union buyers?
  • Will trades have any meaningful role in the development of credit union-owned services or just continue as middleman aggregators?
  • Will league and other organizational consolidations erode the hard-earned loyalty of their constituents?

The Need for Vision

In a time of multiple crises and the ongoing disruption of traditional business tactics, innovation is required. There is no going back. Only forward. What is the vision for that effort?

Where do the authors of break through ideas go today in credit union land? Probably not to the trades where the dominant role is member retention, not leadership. So where will the influence once wielded by the trades move? Where will the phoenix rise from the ashes?

What will be the design of tomorrow’s “association” that attracts future credit union investment and loyalty? Will it combine CUSO business style efforts as well as industry advocacy? Will it be a source for new ideas and independent analysis? Will it form alliances and with whom?

Trade associations will not disappear. Rather, they will stay as vestigial organs celebrating past memories and arranging social gatherings. Meanwhile the designers of the future will have encamped elsewhere.

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Who Is Kyle Hauptman?

Short answer: He is President Trump’s nominee to replace Mark McWatters on the NCUA board.

Real question: Why him?

Chairman Hood’s description: “Kyle has significant experience in the financial services sector as well as the public policy arena.”

Hauptman’s Resume

His politics: Currently he works for Senator Tom Cotton (R-Ark.) as the Staff Director for the Economic Policy Subcommittee of the U.S. Senate Committee on Banking, Housing, and Urban Affairs. He was a voting member on the U.S. Securities and Exchange Commission Advisory Committee on Small and Emerging Companies from 2016-2017. He served on President Donald J. Trump’s transition team in 2016.

Previous professional responsibilities: Executive Director of the Main Street Growth Project and Senior Vice President at Jefferies & Co; a bond trader for Lehman Brothers in New York City, Tokyo and Sydney.

Education: A master’s in business administration from Columbia Business School and a Bachelor of Arts from University of California, Los Angeles.

Personality: Insight to his interpersonal style and philosophy can be found in this Public Square Broadcast from 2016 discussing the book Confessions of an Economic Hitman.

Two Takeaways: Questions and a Lesson Repeated

  1. The Questions: Kyle is intelligent, a free market proponent and familiar with the Wall Street financial world. His republican orthodoxy includes low taxes, skepticism of government, and strong belief in the role of the free market.

He appears to have no experience with cooperatives or credit unions. An important purpose of cooperative design is as an antidote to market shortcomings.  How will his market orthodoxy align with credit unions’ unique role? Will he see them as just another species of financial institution with only a different pedigree? How will his worldly experiences and intellectual skills mesh with NCUA’s bureaucracy? How will he interpret the Board’s “management” responsibility of the Agency as stated in the FCU Act? What does his Main Street slogan “It’s time for Washington to do its job” mean for NCUA?

  1. The Repeated Lesson: At a time of multiple national crises, the trades and credit union system again failed to support a candidate with experiences and knowledge of the industry. The NCUA Board will have another stranger to the history, personalities and institutions that make credit unions who they are. Also lacking is any exposure to NCUA’s multiple institutional responsibilities and its track record, both good and bad, in carrying these out.

At a time when the three Washington DC based trades are sending daily emails about all the hard work they perform representing credit union interests, this appointment is a reminder of how limited their influence is.

The Need to Speak Up

The NCUA Board will still be composed of three persons whose appointments look like filling “jobs for the boys.” It would be refreshing if just once, the NCUA board had an executive who knew something about the industry, believed in its singular role and was committed to seeing it thrive no matter the circumstances. Until credit union people learn to speak up, their “representatives” in DC will continue playing their insider games.

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Do Credit Unions have Enough Capital to Weather Loan Losses from the Current Crisis?

That was the first question the reporter asked. Others followed. Will some fail? Would secondary capital options help?

My Answer and the Data

Yes, the system has adequate capital. Credit unions have total reserves of almost $193 billion and an average net worth ratio over 11%.

In 2019 the industry’s annualized loan losses were .63%. At March 31, 2020, 85% of all loans were secured and first mortgages backed 43% of the portfolio. Unsecured loans were under 10%. The allowance account was 150% of all delinquent loans.

In the Great Recession of 2009, the net loan charge off rate was 1.21%; and in 2010, 1.13%. The market value of homes securing mortgages was a major concern. That is not the case today.

In 2019, the industry’s net loan losses were $6.1 billion. However. credit unions added $6.5 billion to the allowance account and still reported $14.5 billion in net income. Credit unions could see their historical loss rate of .50-.60% grow by three of four times (double the 2009/10 experience) and still be very sound.

Two Capital Sources

Averages provide a macro context, but problems are micro, in individual credit unions. Might individual credit unions have higher than average losses?

A fact of the covid economic shutdown is that the impact on individual households is disparate. According to a Bipartisan Institute Survey, 42 % of households report negative effects on income from the dual crises. For Hispanic households, the result was 60% and for black homes, 54%. Over 59% of single parent households, regardless of race, saw income reduced or were forced to seek unemployment.

Individual credit unions will have differing proportions of members financially impaired. But that is why the cooperative system has two capital sources.

The primary reserves are each firm’s retained earnings. The second is the collective capital in the NCUSIF approaching $17 billion.

Cooperatives’ Collective Capital

Unlike the FDIC fund, the cooperative system’s insurance fund was redesigned in 1984 to be a ready source of capital assistance. This assistance is authorized by Section 208 of the Federal Credit Union Act.

When the FDIC is given a troubled charter by separate supervisory authority, its role is to close the institution by liquidation or sale. Providing FDIC assistance is considered inappropriate because of public policy concerns about the use of “public money” to restore private wealth.

Credit unions create common wealth. Their reserves are the collective savings of all the members. Members in turn send 1 cent of every share in a credit union to the NCUSIF to comply with the 1% deposit requirement.

These collective reserves, updated semi-annually, are always fully available to assist individual credit unions. In the premium model, funds must come from expenses charged to the insured banks.

NCUSIF assistance in the form of cash, subordinated debt or guarantees has been used since the fund’s founding in 1971. These actions not only minimize losses, but most importantly enable familiar service to members who may be caught in the same economic circumstances as their credit union.

Capital Is Not the Issue

The dollars of capital or the level of net worth is not the primary issue for the coop system. Important yes; but more critical is how the reserves are used by credit unions and NCUA. Is it just to expense away troubled credit unions, or to invest to restore sustainable operations?

Cooperative reserves, like all capital, can be underused or misused. In a competitive market system however, capital’s objective is to gain long term returns and create competitive advantage. Liquidation is always the costliest option, both in terms of immediate expense and the elimination of all future income.

Today credit unions are working with millions of members whose financial situation has been disrupted through no fault of their own. Standing alongside members’ transitions can result in years of fervent loyalty. Similarly, the welfare of the whole system is enhanced when credit unions suffering loses, can work to again be sound.

The National Effort to Save Jobs, Assist Consumers , and Support Businesses

Every covid emergency program passed by Congress including the CARES Act with its $600 unemployment weekly increase, $1,200 one-time payments to families earning less than $75,000, the PPP loan program with loan forgiveness, the Federal Reserve purchase of EFT’s with high risk bonds, and its Main Street loans to business are public expenditures intended to prevent corporate and individual financial failure. The goal is to restore the economy and consumers to full activity as quickly as possible.

However, some at NCUA may not have bought into this bipartisan, government-wide effort. Bound by a literal PCA mindset, the NCUSIF’s CFO announced a $60 million addition to loss reserves in the May Board meeting, even though every financial trend presented was in a positive direction.

In April the Inspector General in his semi-annual report to congress confidently predicted: “Given the economic impact of the COVID-19 pandemic, we anticipate an increase in required MLRs in the coming year.” A Material Loss Review is required in every circumstance where the cost of a problem resolution exceeds $25 million.

Chairman Hood has issued policies to give credit unions greater flexibility and time to work through financial downturns. The question is whether these policies will be just press releases or will they change staff behavior

For that to happen, the Chair will need to ensure operational performance. That oversight accountability, not the amount of capital, is the real test for the Agency’s leaders.

Two Observations on Personal Relationships

A credit union CEO during the current pandemic:

I continue to be amazed at how our employees prove to be the best and brightest financial experts in the industry. Our 800-plus employees have been diligent while standing ready to serve and offer smart solutions. I can’t thank them enough and appreciate everything they are doing.

From a Data Processor Executive:

It’s far easier for a community bank to catch up on five years of technical innovation than it is for a neobank (fintech) to catch up on 50 years of hard earned customer loyalty.

Schools Out: Virtual Summer Internships

The summer job market for students out of high school and college is more uncertain than usual. Employment in traditional roles in day camps, athletic leagues, and even retail stores are much fewer.

But remote capabilities, developed to serve members, may also be a way to employ interns in value enhancing projects. Many of these students have spent not just the last semester, but much of their educational experience living in the virtual world.

An Example: The Library of Congress

The Library of Congress is employing 40 undergraduate and graduate students in its 29-year Junior Fellows summer intern program.

The program’s goal is to “enable expanded access to and promote broader awareness of Library resources among members of Congress and researchers, including scholars, students, teachers and the general public.”

All work will be virtual. The ten-week program includes 27 projects across all divisions of the Library.

These range from archiving assets from 20 years of past National Book Festivals, exploring the history of African American business and entrepreneurship, visualizing and mapping collections of literary artists from the Caribbean, Latin America, Iberia and Hispanic or Lusophone cultures, and measuring how different light sources affect the visual aging of inks and papers.

The Junior Fellows also participate in virtual professional-development opportunities including assessments, tours, courses and special events intended to increase engagement with the Library.

In the final week each intern will present their most significant discoveries in a virtual display day.

Virtual Interns

This past Sunday a high school student talked about her frustration when she was unable to join the demonstrations in DC due to a summer rainstorm. The next day, Saturday, she decided to organize her own protest for three days later. Working long days and nights with friends she identified the site an empty municipal library parking lot, notified officials, arranged speakers and asked people to come. She thought several hundred might show up. Nearly one thousand did.

Over the past several weeks, many young people have participated in calls for change. Can we provide this generation opportunities to explore credit unions as one option for their energy, creativity, engagement and commitment? Ten weeks only? And perhaps enable change leaders?

The Choice of Words

The headline seemed newsworthy: Bank Credit Union Merger News

The problem: it was not accurate. Credit unions and banks cannot and do not merge. The brief story did state that a credit union had completed its acquisition of a bank. But then the story continued the fiction by stating “this is the seventh merger of a bank into a credit union this year.”

Why the Misstatement?

Writers have a point of view. In this case the post was to promote the idea that banks and credit unions are much alike. So much so that bank/credit union mergers are not that different from the several hundred merger transactions occurring between credit unions annually.

However, these transactions are purchases in which credit unions pay cash to the owners of the bank in order to acquire the selling bank’s assets and liabilities. They are whole bank acquisitions. These sales are negotiated, often with the help of brokers, accountants, lawyers and other third-party experts to navigate both the business details and the regulatory approvals.

The documentation is very distinct from credit union mergers. The agreements will include representations, warranties, covenants and possibly non-compete and/or employment clauses on top of the detailed financial commitments. By contrast, the NCUA approves real mergers with a template, two paragraph, half-page general statement about transference of assets and liabilities to the surviving credit union.

Normalizing the Abnormal

The effort to portray credit union acquisitions of banks as just another kind of “merger” is supported by a host of intermediaries who benefit financially from the transaction It also provides a thin veneer of “normality” to those credit union leaders who use the accumulated reserves of members to buy out competitors or to enhance institutional size.

These are not, as one NCUA board member characterized them, just market-based transactions. For there is no market accountability before or after the event as there would be in a publicly traded stock. The deals are negotiated in secret, not in an open process. The members have no say; rarely would the transaction provide them any direct benefit. And if the deal does not work out, the owners of the credit union, unlike a bank’s shareholders, have no course of action.

Avoiding the Real Issues

An event may not be illegal, but that does not mean it is wise. Credit unions’ whole bank purchases raise important questions about the role of tax-exempt cooperatives. Should their tax-free accumulation of reserves enable them to buy tax paying banks? How do such transactions promote the unique role of cooperatives in financial services? What are the benefits to existing members? How transparent should the transactions be to members and the public to ensure accountability?

Banks are chartered to make money for their owners. The owners sell when they see it in their personal interests to cash out and reinvest elsewhere or spend their funds for individual purpose. Credit unions are founded on the principle of paying forward the wealth created by generations of members to be used for future members. It is common wealth, not private.

By blurring the lines by using terms like “bank credit union mergers,” the interests of a host of vendors is enhanced and the public perception of credit unions as no different from banks is promoted.

It also enables lazy strategy on the part of credit union CEOs. Organic growth requires innovation, constant focus on enhancing member value and an understanding of the competitive advantages of cooperative design. Buying out competitors may work in the open markets; that is not why cooperatives were formed.