Word from the First NCUA Town Hall

The Credit Union Times just filed a report by Sarah Snell Cooke titled, “NCUA Town Hall Produces Honest Talk”. This is the best accounting of the Clayton, MO town hall that I’ve read thus far. Several potential changes to the operational requirements of the corporate credit unions were discussed, including:

1. a raise in capitalization levels
2. a move towards Basel-type, risk-weighted capitalization requirements
3. a cap of 25% on any specific investment category
4. new limits in weighted average life of assets
5. new stress testing for credit spreads

A heavy topic was also covered concerning the current levels of investing in the corporates by NPCUs (Natural Person Credit Unions).  Cooke gives a good accounting of this exchange:

Some credit union executives questioned why they should give up better yields elsewhere and instead keep some money in corporates. Fazio urged CUs to mull over the net effect. He explained that the better yield to the CUs wouldn’t be worth the losses from the sale of the corporate-held securities, which the withdrawing of deposits would precipitate. The expenses would be passed on to natural person credit unions as premiums.Credit union executives’ heads nodded round the room when one asked the NCUA officials to tell the examiners to back off on their net income requirements for a while so that the credit unions could afford to put money into corporates. Chairman Matz promised a letter addressing this would be forthcoming.

This discussion is relevant to my recent blog post, “Are Credit Unions Shooting Themselves in the Foot?” Not only is moving investments from the corporates to banks an irresponsible move since it is directly funding the competition, it could also trigger the sale of their securities and force NPCU’s to cover those losses through higher premiums. So, the rates banks are offering may be attractive in the short term, but down the road it may be more trouble than it’s worth.

A marketing-centric reason to slow or stop investment in banks:Many credit unions are taking advantage of the negative public perception of banks today with clever ad campaigns designed to highlight the improved member experience at credit unions. The most notable being the “Have You Intentionally Left Bank Yet?” campaign by http://7principles.coop where members line up to share their opinion on why they left their bank for a credit union. What makes it so effective is the authenticity of using actual member’s opinions.

What will ruin this golden opportunity is the news of increased investments in banks by credit unions. Essentially, it shows that credit unions don’t mind profiting at the detriment of bank customers as long as they are not the ones getting their hands dirty.  And it doesn’t matter what fund or account credit union money is earmarked for at the bank, in general it’s benefiting financial institutions who fixed massive losses by charging unethical, usery-level rates to their customers.  I’m afraid it will be difficult to honestly differentiate credit unions from banks if this investment trend continues.