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Why the Ukrainian People Will Be Victorious

This arrangement of a familiar American spiritual is by John Rutter, an English composer who in March composed an anthem to honor the Ukrainian spirit.

The recording below is by the Kyiv Symphony Orchestra and Chorus, two and half years ago.  In Ukraine.

For me it celebrates the indomitable spirit of the people, their artistic joy, and the universal longing all share for peace.

From November 18, 2019:  “I ain’t going to study war no more”

(https://www.youtube.com/watch?v=qJCI22_GDjI)

Ukrain is a democratic country in which courageous leaders arise, respected in their generation and to be honored by those to come.

Winston Churchill in July, 1940, after Poland, Belgium and France had been conquered, foresaw this present moment when he said to the world at that time: “And now it has come to us to stand alone in the breach, and face the worst that the tyrant’s might and enmity can do. Bearing ourselves humbly before God, but conscious that we serve an unfolding purpose, we are ready to defend our native land against the invasion by which it is threatened. We are fighting by ourselves alone; but we are not fighting for ourselves alone.”

 

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Spring Storms

from “The Land”  (1926)
by Vita Sackville-West
That was a spring of storms. They prowled the night;
Low level lightning flickered in the east
Continuous. The white pear-blossom gleamed
Motionless in the flashes; birds were still;
Darkness and silence knotted to suspense,
Riven by the premonitory glint
Of skulking storm, a giant that whirled a sword
Over the low horizon, and with tread
Earth-shaking ever threatened his approach,
But to delay his terror kept afar,
And held earth stayed in waiting like a beast
Bowed to receive a blow. But when he strode
Down from his throne of hills upon the plain,
And broke his anger to a thousand shards
Over the prostrate fields, then leapt the earth
Proud to accept his challenge; drank his rain;
Under his sudden wind tossed wild her trees;
Opened her secret bosom to his shafts;
The great drops spattered; then above the house
Crashed thunder, and the little wainscot shook
And the green garden in the lightning lay.
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Common Sense by Velensky

Thomas Paine on The Crisis

December 23, 1776

THESE are the times that try men’s souls. The summer soldier and the sunshine patriot will, in this crisis, shrink from the service of their country; but he that stands by it now, deserves the love and thanks of man and woman. Tyranny, like hell, is not easily conquered; yet we have this consolation with us, that the harder the conflict, the more glorious the triumph. What we obtain too cheap, we esteem too lightly: it is dearness only that gives every thing its value.

Heaven knows how to put a proper price upon its goods; and it would be strange indeed if so celestial an article as FREEDOM should not be highly rated. Britain, with an army to enforce her tyranny, has declared that she has a right (not only to TAX) but “to BIND us in ALL CASES WHATSOEVER” and if being bound in that manner is not slavery, then is there not such a thing as slavery upon earth. Even the expression is impious; for so unlimited a power can belong only to God. . . .

President Zelensky to the US Congress:

Right now, the destiny of our country is being decided, the destiny of our people, whether Ukrainians will be free, whether they will be able to preserve their democracy.

Russia has attacked not just us, not just our land, not just our cities. It went on a brutal offensive against our values, basic human values. It threw tanks and planes against our freedom, against our right to live freely in our own country, choosing our own future, against our desire for happiness, against our national dreams, just like the same dreams you have, you Americans.

Ladies and gentlemen, friends, Americans, in your great history, you have pages that would allow you to understand Ukrainians, understand us now when we need you, right now.

Remember Pearl Harbor, terrible morning of Dec. 7, 1941, when your sky was black from the planes attacking you. Just remember it. Remember September the 11th, a terrible day in 2001 when evil tried to turn your cities, independent territories, in battlefields, when innocent people were attacked, attacked from air, yes. Just like no one else expected it, you could not stop it. . .

And in the end, to sum it up, today — today it’s not enough to be the leader of the nation. Today it takes to be the leader of the world, being the leader of the world means to be the leader of peace.

Peace in your country doesn’t depend anymore only on you and your people. It depends on those next to you and those who are strong. Strong doesn’t mean big. Strong is brave and ready to fight for the life of his citizens and citizens of the world. For human rights, for freedom, for the right to live decently, and to die when your time comes, and not when it’s wanted by someone else, by your neighbor.

 

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Why Chairman Harper Will Merge the NCUSIF into the FDIC Before His Term Ends

Let’s be frank.  Chairman Harper has yet to be confirmed by the Senate to his new term.  Therefore he is keeping his most important initiative under wraps until he officially has the job

But he has made no secret of his “Commander’s” ambition when he proclaimed at the March board meeting, “NCUA will guide the credit union system through the economic uncertainty caused by inflation, rising gas bills, and continued supply chain woes.”

After the Senate approves his appointment, he will reveal his “guide” plan: merging the NCUSIF into the FDIC.  There are two ways this can be accomplished, which I explain at the end.

It is important to understand why Harper sees this as his top priority.  Even more critical is recognizing how much support this merger proposition will have from credit unions and all other system stakeholders.

Harper’s Idealization of the FDIC

Since his appointment to the NCUA board Harper has continued to tout the FDIC as the gold standard for regulators.  He has repeatedly spoken of their consumer exam prowess (see GAC remarks), the FDIC’s financial flexibility, its support of MDI institutions and even their subsidized employee cafeteria.

In brief, he has concluded that NCUA cannot compare with the FDIC’s competencies, so his solution is to join with them.

But there is more than Harper’s FDIC-envy motivating the plan.  His core belief is that scale matters and that larger size means greater competence.  With the FDIC’s scale and NCUA’s mission driven purpose, the success of credit unions is virtually guaranteed.

NCUSIF’s “Tall Tree” Problem

The “tall tree” phenomena refers to risk underwriting when an organization represents a disproportionate amount of exposure.

The other board members sympathize with Harper’s view that  “bigger-is-better.”  They know that Navy FCU’s assets are over eight times as large as the NCUSIF.  If Navy’s NEV fell near zero in an examiner  shock test, the NCUSIF would face a bigger problem than all the corporates combined in 2009.

Adding the FDIC’s $123 billion and the $5.0 billion NCUSIF equity, the agency need no longer worry about “tall trees”  whenever examiners’ IRR modeling shows a PCA solvency shortfall.

Harper has other reasons for the merger in addition to his scale ambitions.

  • FDIC’s insurance fund has a superior financial model. Its premiums are risk based, open ended and there is no cap on fund size;
  • FDIC has no 1% deposit, so there is no controversy about “double counting” the fund’s assets:
  • FDIC has no accounting issues about true-ups, proper reserving and no independent private audit:
  • FDIC examiners are better at consumer compliance, technical analysis and asset liquidation management;
  • FDIC is a superior, more recognized brand than the NCUSIF;
  • The five person FDIC board has a vacancy that Harper will request be reserved for the NCUA Chair going forward (similar to OCC membership).

Credit Unions will support the merger because:

  • Transferring NCUA’s insurance activities will reduce its annual budget by at over $200 million, or 62%, the current OTR rate, for insurance related expenses;
  • Credit unions’ 1% deposit will be returned so they can once again earn a market yield;
  • FDIC’s premium expense is currently only 3 to 5 basis points per year which could be paid out of the yield on the 1% returned deposit if rates reach 3-5%;
  • Buying banks will be much easier for credit unions with only one insurer’s approval required;
  • FDIC’s logo will show members that credit unions are really on a level playing field with banks;
  • All credit unions already comply with FDIC’s capital requirements thanks to RBC/CCULR;
  • Credit union mergers show their belief that scale is the most important attribute to achieve cooperative purpose;
  • FDIC’s solvency has in fact been guaranteed by the US government, whereas the only proof for NCUSIF’s backing is a sentence in NCUA’s press releases.

Members will support the move because:

  • They were told the NCUSIF coverage was the same as the FDIC;
  • The FDIC is a better known brand;
  • The 1 cent of each share dollar members now send to fund the NCUSIF will be returned to the credit union;
  • Members have been told that credit unions offer “better banking”-this confirms that belief;
  • It doesn’t make any difference–insurance has never been the reason they joined the credit union in the first place. For the first 60 years of financial cooperatives there was no share insurance.

Why the FDIC will support the plan:

  • The $4.9 billion in NCUSIF equity to be added via the merger is more than 2 X the risk being transferred in the total assets of all CAMEL code 4 and 5 credit unions;
  • Eliminates an embarrassing financial comparison for the FDIC ‘s 90-year-old premium based model and its habitual inability to achieve its normal operating level;
  • The FDIC’s monopoly of deposit insurance will expand its power and influence especially within the cooperative system.

State regulators and NASCUS will support the merger as it will strengthen the dual chartering system:

  • It ends debates with NCUA about whether their rules apply to state charters or just FCU’s. Going forward, SCU’s will have just their one state regulator;
  • NASCUS will no longer have to argue about the Overhead Transfer Rate which caused state-chartered credit unions to pay a disproportionate share of NCUA’s operating expenses;
  • It eliminates the need to expand the NCUA board to include a state regulator;
  • The FDIC’s largess for examiner training is superior to NCUA’s;
  • It will activate state charters’ interest in cooperative insurance options. Credit unions in WI, FL, IA, MI and WA will seek to restore a choice of insurer.

CUNA/NAFCU will support the merger:

  • It certifies the level playing field for credit unions-a long term goal;
  • There are expanded opportunities for Lobbying for their DC staffs.

Congressional Democrats will support the merger:

  • All three NCUA board members were appointed by President Trump but democrats now are the majority on the FDIC board.  The party believesTrump holdovers should not control an agency in a democratic administration.

Congressional Republicans will support the plan:

  • It simplifies government and eliminates a federal agency overlap (NCUSIF) for the same activity;
  • Credit unions don’t pay taxes but this will require them to help pay for the federal government’s future FDIC bailouts during the next banking crisis;
  • It will relieve representatives of having to chose between their banking and coop constituencies as both will be under a common regulatory system.

Two Paths for Implementing Harper’s Merger Plan

 

One approach is to propose congressional legislation.  As Chair, Harper has already communicated to Congress his requests to change the NCUSIF’s financial model and modify CLF’s membership requirements.

While the legislative path is always uncertain, this effort could have bipartisan appeal as it is unlikely to have any opposition from credit unions or the banking industry.

Should this approach not prove feasible, then Harper will follow the same process used to implement the NCUA’s CCULR capital rule.  The banking industry required congressional legislation to add this option to the FDIC’s capital requirements.   NCUA was not mentioned in this CCULR enabling legislation.

However, Harper went back to the original PCA requirement from 1998 that said credit union safety and soundness requirements must be comparable to banks’.  NCUA said that bank regulators were authorized to offer CCULR, ergo credit union regulators have the same authority.  All three board members agreed with this legal reasoning.

Using this precedent, NCUA can mandate FDIC insurance  for credit unions by a rule based solely on the PCA requirement of “comparability.“ For there could be no greater comparability than a common insurer for both credit unions and banks.  The implementation could be done quickly,.  Credit unions were given just 9 days to comply with CCULR once it was passed.by the board.

In conclusion

Readers.  It is April 1.

I am not saying that NCUA should merge the NCUSIF with the FDIC.

It would likely be a shock for market-shy cooperatives to be in the same league as the profit-driven banks.

I’m just saying that it could happen.

And that it almost certainly will happen.

Because Harper has shown he gets what he wants. Moreover, credit unions could really end up screwing the banks using their newly won FDIC emblems while  holding onto their tax exemption.

After all, different charters are just legal fictions anyway. All financial institutions do the same things.

FDIC’s scale will facilitate even faster credit union growth from more bank buyouts and ever larger mergers.

And members will have peace of mind knowing that all along the NCUSIF was no different from the FDIC.

 

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NCUA CAMEL”S” Rating Goes Live on April 1, 2022

In the October 2021 Board meeting, NCUA approved adding an “S” to the CAMEL examiner rating system.

In announcing this action Chairman Harper stated: “The NCUA’s adoption of the CAMELS system is good public policy and long overdue.  It will allow the NCUA to better monitor the credit union system, better communicate specific concerns to individual credit unions, and better allocate resources.”

The rule’s effective date is tomorrow, April 1.  I have been critical of some agency actions in the past. But, this rule is imaginative, even revolutionary, in its implications.

However,  its significance may have been lost do to the recently  implemented RBC/CCULR, on January 1, with the first calculations due as of March 31.  External events such as cyber alerts, the Ukraine war crisis, growing inflation and the run up of interest rates also divert attention.

Special Training for Examiners

The rule’s innovative “S” component required extensive examiner training.  As announced in its 22-CU-05  March 2022 Supervisory letter: NCUA staff will receive training on how to evaluate the new ‘S’ component and the updated system.  In addition, the training will be made available to state regulators’ offices, for those that elect to use the CAMELS rating system.  There is also an industry training webinar planned for credit unions, which seeks to provide a greater understanding of the updates to credit union stakeholders.

Some credit unions may have missed the agency’s transparency efforts, so a brief summary is provided below.

The Imaginative “S” for CAMELS-A Seven Part Analysis

This innovative “S” approach will have significant benefits for all stakeholders—members, other credit unions,  regulators, even the public.  The questions include safety and soundness criteria that align with cooperative principles.  The final ratings are fully comparable with every other credit union regardless of asset size.

Each of the seven “S” criteria are scored independently. These scores are then added for a Grand Total.

Part 1 is traditional. It reviews a credit union’s field of membership process and how open and valued members are.  Market demographics and FOM strategy are assessed.

Parts 2 and 3 look at members’ financial participation, how capital is deployed for their benefit, and members’ involvement in credit union governance and volunteer roles.

Two critical safety and soundness factors are next. Part 5 reviews the credit union’s education and training for  staff and members. It documents external certifications, degrees and recognitions earned (Best Place to Work).  The cooperative section appraises the credit union’s role in CUSO’s and other organizations, such as fintechs, to build a stronger financial system.

The final section 7 reviews all aspects of a credit union’s Concern for Community.  Community is more than geographic boundaries.  It includes partnerships with organizations which “share common goals or opportunities and who choose to work together for everyone’s success.”

Objective, Comparable and Fully Transparent

The overall “S”  1 through 5 rating is determined by the Grand Total Score.   As shown on page 11, a score of over 100 results in a CAMEL 1.  The scores are intended to be shared industry-wide and can be posted in the credit union with the monthly financial statement.

In his March 5, 2022 Supervisory letter cited above, Chairman Harper encouraged dialogue:

The NCUA’s policy is to maintain open and effective communication with all credit unions it supervises. Credit unions, examiners, and regional and central office staff are encouraged to resolve disagreements informally and expeditiously.

As with any change in a supervisory approach, we understand credit unions and other stakeholders will have questions.

Long Overdue

This “S” addition breaks new ground.  It is “long overdue.”   A copy of the entire 11 page form with  descriptions of each section and the individual scoring components is here.  It  is interactive and can be completed online now.

Achieving a high CAMEL”S” score should not be any burden for most credit unions.  Service has been an integral part of the credit union model from the beginning.

Most importantly, the “S” highlights the cooperative difference.  It documents how credit unions  are poles apart from banks.  I believe credit unions should applaud NCUA’s alignment of its examinations with credit union  purpose.

For additional information, NAFCU has also posted this brief, more  prosaic analysis of the rule.

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FOMO Business Decisions

One of the most common sales pitches in life is “hurry up and get this  deal before someone else buys it.”

The Fear of Missing Out (FOMO) has many variations.   For some it impels stocking up on toilet paper in a pandemic.  For others it is a rush into NFT’s, crypto currencies, a meme stock or  IPO offering.  Home sales today are increasingly all cash offers, no contingencies-FOMO.

For the virtual generation, it is the sharing pictures on social media of a special meal  or vacation adventures to stay in touch with peers-FOMO.

In credit unions, this tendency shows up most frequently in mergers and whole bank purchases. Both transactions are enabled by consultants, brokers and other experts who only get paid if a sale occurs.   Creating a sense of urgency-FOMO- around each opportunity is part of the pitch.

This blog will focus on bank purchases.  Many press  announcements  of another deal close with a momentum building observation such as:  “The pioneer (arranger) for credit union purchases of banks, emphasized again that the speed of CU purchases of banks is quickening.” FOMO

FOMO Bank Purchases

A number of credit union bank purchases are repeat buyers.   GreenState in Iowa during 2021 announced three  bank purchases in a 12-month period.  All were out of state and entering separate new markets.  Three deals with different banks, requiring multiple system and cultural conversions all at once.  To keep up with this purchased growth, the credit union has issued $60 million in subdebt to sustain its capital ratio.

Vystar’s purchase of Heritage Southeast Bancorporation, Inc. ( HSBI )is the largest bank acquisition by a credit union to date. HSBI is a holding company of three local community  banks which together manage $1.6 billion in 22 branches across Southeast Georgia, through Savannah and into the Greater Atlanta Metro area.

To support this acquisition, the Jacksonville based Vystar just issued $200 million in subdebt to maintain its net worth ratio.  The final closing has been postponed twice this year.

In early March  he $2 billion Barksdale Federal Credit Union in Bossier City, La., agreed to buy the $74 million Homebank of Arkansas in Portland, Ark.  Here are some details from the Credit Union Times story:

This is Barksdale FCU’s first bank purchase. Homebank was founded in 1908, employees 25 and has about 1,000 customers.  The bank was issued FDIC Consent Orders in 2011 and 2019.  The Bank reported a loss in 2020 of $419,000 and $50,000 in 2021.  Capital is $7.4 million

In explaining the purchase which would seem to bail out the bank’s owners, Barksdale’s CEO  stated:   “We believe that the structure and policies we have in place with our operation will satisfy the consent order items.”   One wonders what the members would think of this use of their funds.

The Risks in Bank Purchases

Buying whole banks at multiples of book value, or at prices much higher than recent market valuations,  creates an intangible asset called goodwill.   These are all  cash purchases. The total member funds paid for the premium and net worth goes to the bank’s shareholders.

In almost every case, but especially in private bank purchases, there is very little transparency for members or analysts to evaluate how the decision will succeed financially.  There is no expected ROI on the investment, nor business plans for achieving it. The incantation used is variations on the theme of scale.

In cases of very large transactions relative to the credit union’s assets  (see Memphis-based Orion FCU’s efforts), or multiple acquisitions in a short time, or when the bank is underperforming, all of the normal risks are multiplied.   Yet the actual outcome may not be known until years down the road.

A  Former CEO’s Observations

I was copied on an email in which Jim Blaine, retired CEO of SECU (NC) highlighted some of the differences in community bank practice and credit unions.   The dialogue began after a credit union member asked his impression of the $4.8 billion Summit Credit Union’s intent to buy the $837 million Commerce State Bank in West Bend Wisconsin.  Here is a part of what  Blaine wrote:

This is an example of the “other problem” floating around in CUs. As you’ll note, Summit is not merging, it is “acquiring” an investor-owned  bank. First, it is illegal for a CU to own a bank charter, so actually Summit is acquiring only the assets/liabilities of the bank (the loans and deposits, the buildings, computers, etc but not the capital!)…and after doing so the bank charter is cancelled.

To judge the fairness of the deal, look for the acquisition multiple…usually quoted as some multiple of the the bank’s net worth (i.e. capital)…if the bank’s net worth is $100 million for example and Summit is purchasing the assets/liabilities for a multiple of “1.5X”then Summit will pay $150 million to the bank stockholders. (Paying 150% of the book value!!)

Just as with CU mergers, these bank “purchases” can be open to significant valuation variance. In an investor-to-investor transaction the owners on both sides scrutinize whether or not the deal is for “fair value”. With a CU there is not an activist group of shareholders to protest a bad deal. Not too hard to imagine an insider “wink and nod” transaction…in the example above that $50million excess might lead to some “flexible ethics” …certainly happened with the mutual S&Ls!

Many folks question both the viability of small banks and those branches! (ed. Commerce is the 32nd largest bank in Wisconsin) And besides in banking, customers are loyal to the individual banker, not the bank. The officers and directors at the bank will usually collect on the sale of the bank stock and then as soon as possible leave and take their book of business to another bank…and of course refinance away those loans the CU bought! On the deposit side, many of the larger deposits are tied to loan customers who  will also leave. Lastly, all the bank customers have always had the chance to join the CU…and didn’t…what does that tell you about their future loyalty?

A Different Kind of Deal

Other acquisitions this year include the $2.8 billion Arizona FCU (AFCU) purchase of the $539 million Horizon Community Bank in Lake Havasu City;  Georgia’s Own purchase of Vining Bank; and Robins Financial acquisition of Persons Banking company.

AFCU’s activity is somewhat more public in that some of the financial information is available.   It appears the credit union is paying about twice  book value.  In the year before the sale was announced, Horizon’s holding company stock traded between $8.20 and $10.40 per share.   The bank’s sale announcement projects  shareholders should receive approximately $18.91 per share when finalized.

In addition to the factual circumstances Blaine cites in his comments, there are two other operational challenges.    Are credit unions acquiring  matured/declining banking businesses especially when recent market valuations are substantially less than the purchase price?

The conversion of a community bank’s clientele to credit union control entails an “identity transplant” both internally and in the bank’s market.  How will the value of the acquired assets and liabilities be affected by this change?

Finally in several examples above, the credit union’s loan to asset ratios ranged from the low 40% to just over 50%.   If the leaders are unable to deploy existing funds in loans to members, how will they be more successful buying bank assets?

The lack of transparency in these purchases, the absence of any financial projections or specific business tactics suggest these are events based on good intentions but limited operational planning.

One CEO explained his purchase  this way: “We believe that quality growth and diversification is essential to continued success in our industry, and we intend to achieve it both organically and through mergers or acquisitions.”

This sounds like a strategy driven by FOMO, not member focus.

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Subdebt: The Fastest Growing Balance Sheet Account for Credit Unions

Outstanding subdebt (subordinated debt) for  credit unions grew 51% in 2020 to total $452.1 million.  In 2021 the increase was 109% and with credit unions reporting  $938.9 million.

The number of credit unions using this financial option grew from 64 in 2019 to 104 credit unions at December 2021.  The total assets of these credit unions was $96 billion or about 5% of the industry’s yearend total.

A Product with Many Facets

This financial instrument has many characterizations. Subdebt is reported as a liability, that is a borrowing, on the credit union’s books.  But because of the structure of the debt, NCUA considers it to be capital when calculating net worth for RBC-CCULR and all low-income credit unions.

Subdebt can be sold to other credit unions as well as outside investors. Purchasers perceive it to be an investment, but technically it is a loan to the credit union which makes  it as an eligible “investment”  for credit unions to hold.

“A Watershed Moment”

Earlier this month Olden capital announced the largest placement yet: a $200 million borrowing sold to 41 investors including credit unions, banks, insurance companies and asset managers.

The process as described in the release required: The coordination of a team that included leaders from the credit union, investment bankers, lawyers, other consultants and service providers. . . Olden labelled it “a watershed moment, notable for its size and breadth.”

Certainly considering size that is an accurate statement.  This one placement exceeds 40% of the total of all 2021 debt issuance.  Credit union demand is certainly picking up and more intermediaries are getting into the business to arrange transactions.

Olden did not name its client, although the purchasers were aware that it was Vystar Credit Union.

Why the Rapid Subdebt Growth?

This borrowing is a form of “Buy Now, Pay Later” capital for credit unions.   The terms of the debt are generally ten years with no repayment the first five, and level amortization of 20% each in the remaining years.

The interest paid is based on several factors including market rates and the credit union’s overall financial position.

Traditional credit union capital comes only from retained earnings. Maintaining well capitalized net worth means that comes only  from earnings means the process places a “growth governor” on a credit union’s balance sheet.

By raising subdebt this organic “growth governor” is removed in the short term.  Some credit unions have been bold to say that their intent is to use the newly created capital for acquisitions.  Both VyStar and GreenState ($60 million in subdebt) have been active buyers of whole banks.

The overnight increase in the well capitalized net worth category from 7% to 9% by NCUA on January 1, 2022 is also causing credit unions to look at ways to comply with this higher requirement.

Others believe it will help them accelerate investments that might otherwise be spread over several years.

Getting into the Leverage Business

Because subdebt has a price, unlike free retained earnings, and its function as capital is time-limited, its use requires increased asset growth to be cost effective.

It refocuses credit union financial priorities from creating member value to enhancing financial performance through leverage.   This leverage requires both increased funding and  matching earning assets to achieve a spread over the costs of these increased funding.  Buying whole banks is an obvious strategy to accomplish both growth goals at once.

The Unintended Consequences

The use of subdebt as a source of capital was provided as a sop to help credit unions meet NCUA’s new higher and much opposed RBC capital standards.

The irony is that its use will entail a more intense focus on balance sheet growth to pay the cost of this new source of net worth.  Unlike retained earnings, the benefit is only for a limited period.

The event will impose a new set of financial constraints or goals that have no direct connection with member well being.  It converts a credit union’s strategy from “member-centric” to maximizing balance sheet financial performance.

In later blogs I will explore some financial model options for subdebt, the transaction costs and other factors in its use.

One of the most important needs at the moment is for greater transparency for individual transactions.

These are ten-year commitments that may exceed the tenure of the managers and boards approving the borrowings. The financial benefits and impact on members will  not be known for years.  This is  especially true when the primary purpose is to acquire capital as a “hunting license” to  purchase other institutions.

This rapid and expanded use will have many consequences for the credit union system, some well-meant, others unintended.   It is a seemingly easy financial option to execute that the cooperative system will need to monitor.

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‘It’s the End of the World as We Know It’ (and I Don’t Feel Fine)

The title is from a Commentary by William Reinsch written four days after Russia’s invasion of Ukraine.

He is the Scholl Chair in International Business at the Center for Strategic and International Studies. His professional specialty within government and outside is international commerce and trade policy.

His article projected the end of the rules-based system of international trade that had been developed post WW II.

He foresees the war causing economic chaos, a return of power politics, and resurgence of authoritarianism.  The world will not be the same; unintended consequences will proliferate.

Turning Points in History

In individual, organizational and country’s histories there are moments that are eventually understood as turning points.  Sometimes these are sudden and instantly consequential.  Like Ukraine.

Other changes occur slowly, but inexorably, in a new direction with the outcome unseen for years.   For example the evolving demographic composition of the American population; or even the  inevitable forces leading to the deregulation of financial services in the 1970’s and 80’s.

I believe the century long credit union movement is in one of these transformational periods. This  involves significant changes in the regulator’s role,  credit union business priorities, accepted performance norms and the ambitions of leaders.

These cooperative developments are occurring as economic trends are moving away from the two decade  experience  post 9/11.   Inflation is nearing 8%, unemployment is at historic lows, worker shortages are occurring in many sectors, and interest rates  are projected to rise to potentially the highest level this century.

The juncture of these economic and industry changes could significantly alter the institutional makeup of the cooperative system. They could result in the loss of credit union’s independent identify and purpose.

The Breakdown in the Regulatory-Industry Relationship

The seeds were sown in the disruption of the Great Recession in 2008-2010.  The scope of the potential corporate problem created a rupture between NCUA and the industry.

NCUA leaders whether through fear, inexperience or bureaucratic instinct distanced itself from credit unions.   The agency took  the sole role of developing one all encompassing solution for five distinct corporate balance sheets.  The results were disastrous for credit unions, the corporate system and the credit unions that relied on them.  Additionally, 30-year industry partnership for the CLF was ended.

The most critical long term loss however was not financial, but the agency’s ability or willingness to work collaboratively with the industry—on all issues and in all circumstances.

Instead of viewing their role as empowering a system of cooperatives, NCUA positioned itself as rulers over the credit union system.

At the March 2022 Board meeting this view was expressed by Chairman Harper in comments on the agency’s Annual Performance Plan:  With the geopolitical crisis unfolding in Ukraine, the NCUA will also continue to prioritize cybersecurity and guide the credit union system through the economic uncertainty caused by inflation, rising gas bills, and continued supply chain woes.

This paternalistic or in loco parentis approach to regulation and supervision emerged from the agency’s ability to impose solutions and rules unilaterally following  the corporate crisis.

The agency publicly proclaimed its independence under Chairman Matz from both credit union involvement and external oversight.  No one at the board or staff has been able to replace the critical experience and knowledge credit unions brought to all issues.

Credit union experience is absent in the regulatory bureaucracy. Credit unions manage over $2.0 trillion for over 100 million members but they have little to no voice in policy priorities.   Stakeholders, both members and the professional leaders, are viewed simply as recipients of perceived regulatory wisdom.

Increasingly credit unions are developing new financial schemes with the regulator seemingly oblivious to their impact on these credit unions or the member owners.   The wheeling and dealing in mergers, bank purchases and raising external capital is accelerating.

The makeover of a number of credit unions from member-centered to financial strategists, gamesman, hustlers and horse-traders is well underway.

This failure to interact removes NCUA’s most important resource – the industry’s professional leadership experience.   Mistakes will continue to be made and paid for by credit unions due to the missing counsel of those who make the system work on a daily basis.

Overcoming the Schism

Credit unions created NCUA and designed and passed in Congress all of its constituent capabilities specifically the NCUSIF and CLF.

Board members seem divided between two binary positions:  let the free market determine outcomes or, NCUA must pass rules to micromanage every credit decision and balance sheet IRR risk.

Effective NCUA regulatory policy is not democratic or republican, or even bipartisan; it is pragmatic supported by facts, logic and cooperative purpose.

Rules and manuals in the thousands of pages cannot replace business judgments and may in fact result in reducing sound operational choices.

Mutual respect is missing.  Credit unions are intimidated or consider fruitless any effort to critique ineffective agency actions.   NCUA’s most frequent justification for more rules is comparison with other financial regulators.

Mutual dialogue creates respect and enhances understanding of shared responsibility.  Future posts will describe changes in priorities, norms and professional ambitions shaping industry character.   All are examples of events occurring without the benefit of public dialogue.

 

 

 

 

 

 

 

 

 

 

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For Ukraine’s Hour of Need

From English composer John Rutter:

https://www.youtube.com/watch?v=lJl3kVwl2-U

Blue Skies Over Golden Fields of Grain

The Ukrainian flag is literally about grain

General Patton on prayer (December 8, 1944:

Chaplain, I am a strong believer in Prayer. There are three ways that men get what they want; by planning, by working, and by Praying. Any great military operation takes careful planning, or thinking. Then you must have well-trained troops to carry it out: that’s working. But between the plan and the operation there is always an unknown. That unknown spells defeat or victory, success or failure. It is the reaction of the actors to the ordeal when it actually comes.

Some people call that getting the breaks; I call it God. God has His part, or margin in everything, That’s where prayer comes in. Up to now, in the Third Army, God has been very good to us. We have never retreated; we have suffered no defeats, no famine, no epidemics. This is because a lot of people back home are praying for us. We were lucky in Africa, in Sicily, and in Italy. Simply because people prayed.

But we have to pray for ourselves, too. A good soldier is not made merely by making him think and work. There is something in every soldier that goes deeper than thinking or working–it’s his “guts.” It is something that he has built in there: it is a world of truth and power that is higher than himself. Great living is not all output of thought and work. A man has to have intake as well. I don’t know what you call it, but I call it Religion, Prayer, or God.

 

 

 

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Perspectives on War

John Donne:

”If a clod be washed away by the sea, Europe is the less, as well as if a promontory were, as well as if a manor of thy friend’s or of thine own were: any man’s death diminishes me, because I am involved in mankind, and therefore never send to know for whom the bell tolls; it tolls for thee.”

John Donne, Meditations XVII, 1623)

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Walter Cronkite

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Marina Ovsyannikova, an editor at Russia’s state-run Channel One network

March 14, holding sign on Russia’s Main TV Channel: “Stop the war. Don’t believe the propaganda.  They are lying to you.”