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How NCUA’s Corporate Actions Affect the Three Pillars of Our System’s Financial Integrity and Soundness

Submitted by cfilson on October 18, 2010 |

The credit union regulatory structure remains as unique today as it was when it was created. The system was shaped by law and design through continuous and thoughtful evolution from 1970 to 2002. Its three pillars have parallel components in the banking and thrift industries, but the credit union infrastructure is uniquely interwoven compared with those on the banking and thrift side. The pillars are:

  1. Chartering, supervision, examination, and — critically important — public reporting of call reports
  2. Insurance
  3. Liquidity lending

The thrift industry’s consolidation of these three functions within the Federal Home Loan Bank Board was dissolved after the thrift crisis of the 1980s. The Office of Thrift Supervision became an office within Treasury and will soon be merged into a single federal bank charterer. The Federal Home Loan Banks expanded their membership to include banks, credit unions, and others engaged in real estate lending and had an independent regulator, the Federal Housing Finance Board; the banks are now under the Federal Housing Finance Agency. The FSLIC fund was put under FDIC management and eventually merged into a single FDIC fund for banks and thrifts with a common, tiered premium structure.

The banking industry has always had separate pillars in chartering and supervision offices, the FDIC for insurance-liquidation, and the Federal Reserve as the lender of last resort as well as a settlement option.

The Unique Cooperative Model: A Generation’s Design Efforts
The combination of these three functions under a common board at NCUA reflects cooperatives’ collaborative approach, their ability to take the long view, and the unique financial models provided by collective capital, the base for both the CLF and NCUSIF financial structures. The three aspects were not created all at once but evolved from 1970 through the mid-1990s in a constructive, continuing dialogue between credit unions and the regulator, along with periodic rule adjustments.

Credit union regulation is different by design and when used effectively can be a source of enormous advantage and stability. It’s different because the role of credit unions is not the same as banks and thrifts, even if the tools used are similar. Credit unions are a way for members to organize, control, and direct resources and meet the needs for which for-profit firms do not offer solutions or offer solutions on terms not in the consumer’s best interest.

The regulatory design emerged from examples at the state level and in response to external conditions, especially the transition to deregulation and the forces of competition. Moreover, real dual chartering options still exist in credit unions because their insurance, regulation, and liquidity are not solely dependent on a single federal source.

The Uncertainty of Credit Unions’ Liquidity Pillar Today
If any of the three pillars disappears, is uncertain, or just wobbly, the financial stability of the entire system is at risk. If examination and supervision is faulty, everyone pays for mistakes, as were just disclosed by the $170 million loss at St. Paul Croatian FCU. If insurance is not properly funded and used for mutual benefit, it becomes an open-ended expense for liquidation rather than a collaborative resource for renewal and recovery.

However, the most consequential factor in any system is not one of these first two, which are used to some degree or other continuously. In a crisis — when markets become dislocated, credit and traditional lines dry up, and panic ensues — it is the liquidity pillar that matters most. Warren Buffett in Berkshire’s 2009 Annual Report described how he prepared for such a market crisis to illustrate his core business approach of “Invert, Always Invert” traditional concepts of accepted business strategy: “We will never become dependent on the kindness of strangers… [W]hen the financial system went into cardiac arrest in September of 2008, Berkshire was a supplier of liquidity and capital to the system.” Berkshire shifted money to no less than Goldman Sachs, Harley Davidson, GE, and Tiffany, and bought its unowned portion of the BNSF transportation firm. These were all blue chip firms, leaders in their market categories but paralyzed by the crisis. In many instances Buffett’s commitment enabled these firms to raise additional funding from other investors.

Only two other sets of institutions can make the same claim as Buffett’s for being suppliers of liquidity in 2008-09: 1) the federal government (the Treasury and the Fed in the form of direct loans and guarantees) and 2) the credit union system, whose total loan originations was a record $258 billion in 2008 and grew by 7.2 % to $272 billion in 2009 — the same year bank lending fell at an “Epic Pace” (as described by a Wall Street Journal headline).

In a crisis, liquidity is the ultimate resource. You can have a perfectly examined system and all the capital in the world, but when a liquidity event erupts, it overrides all else no matter how successful you are. So if Warren Buffet thinks liquidity is critical for a manufacturing firm and other businesses, liquidity is even more critical for a financial intermediary that borrows short and lends long. Only one asset pays par at all times — that’s cash. That outcome assumes the cash is in your control via collateral or other means to force the holder to repay on demand. A liquidity problem trumps capital, trumps regulatory oversight and rules, and makes the strongest, well-run firms weak and vulnerable.

Corporates and Credit Union Liquidity
Corporates are the primary reason credit unions were not reliant on the “kindness of strangers” during the recent Great Recession crisis. As recently as July 31, 2010 (time of the latest available data), the corporate system had more than $62 billion of advised lines of credit to their credit union members. These advised lines are often tied to the settlement account, allowing for convenient overnight advances if a member credit union overdraws its account. They are not contractual obligations and are most often supported by a pledge of assets, so the loan is seamless, convenient, and without worry. If lines are unused, there are usually no fees, and to activate them there are usually no fees, only the interest on the borrowing. These lines are continually monitored by corporates, which developed them as a vital part of their relationship value model.

These lines were a critical factor for why and how credit unions continued to be net providers of loans when the rest of the financial markets was frozen. Corporates had a track record and member confidence built over a 23-year series of events: the October 1987 stock market crash, the 1990-91 recession, the 1997 Russian debt/long-term capital crisis, the Y2K fears of system lockups, the 9/11 market shutdowns, and most recently, keeping liquidity intact in the worst market conditions of modern economic times. The corporate system’s liquidity function worked as it was designed to, even in the most difficult environment since the Great Depression.

The corporates were so dependable that even when a few larger members withdrew their funds early in 2008 at the peak of the crisis, without notice in many cases, the corporates honored billions of dollars of early withdrawals, charging only minimum early withdrawal penalties. And liquidity isn’t just advised lines and formal loans. Corporates had multiple additional programs helping credit unions manage balance sheet related liquidity, such as swaps, participation programs, secondary market aggregation (Charlie Mac), and multiple advisory and business solutions.

These options are at best uncertain today, if not formally eliminated by the conservatorships and the resulting changes in regulation. Some corporates are proactively reducing or canceling lines when credit unions are given specific CAMEL scores or report losses. This uncertainty is compounded in that almost all external sources of liquidity are also facing unknown futures. Thus at the same time the NCUA is removing much of the authority and flexibility to support credit union liquidity, Fannie and Freddie are in conservatorship; the FHLBs have their own investment issues, have much smaller lines, and require full collateralization and a borrower’s CPA opinion audit; and the bankers, if not strangers, are certainly competitors. If that weren’t enough to provide grave concern about system financial soundness, the CLF, the industry-created and -funded lender of unfailing reliability, was missing in action in 2008 despite repeated requests. The CLF was the one cooperative resource that Congress understood and responded to — not TARP allocations or other new programs. Congress raised the appropriated borrowing limit from $1.5 billion to more than $41 billion, the statutory maximum. Unfortunately the funds were not available until NCUA used them as a tool for conservatorships, failing to respond to repeated corporate and industry requests for liquidity and protracted credit assistance in both 2008 and 2009. It’s not even clear the CLF is operational today, let alone will be in the near future, because the source of almost all member capital, the MCS shares, have been extinguished at U.S. Central.

The Liquidity Pillar is Crumbling
With the industry-developed liquidity solutions now being dismantled, the NCUA’s corporate actions raise significant questions:

  • How will the advised lines be replaced? If within corporates, what will be their sources now that their internal portfolio of funding is so limited and external borrowing capability unknown at best?
  • How will credit unions replace the other liquidity, funding, and balance sheet management tools that are closely integrated with settlement and the continual relationship monitoring these other solutions entail?
  • How will credit unions be able to be players in an FHLB system that is under stress and in which they have virtually no governance representation, contribute only about 4% of assets, and provide loans only on an underwriting- and collateral-secured basis for which many credit unions may not be able to easily qualify?
  • Where in NCUA’s presentations, plans, and forecasts are these issues discussed and options listed and the consequences of reducing the industry’s internally funded sources analyzed?

Since WWII in only one year did credit unions not expand their balance sheet loan portfolios. That was 1981. The reason was the disintermediation that the deregulated money market mutual funds were having on insured deposits subject to rules on what credit unions could pay consumers, 5 1/4% thrift passbook savings limit and the 7% regular share limit for FCUs. When liquidity falters, the loan window is shut, credit becomes difficult for even the most qualified borrowers, and the ability of credit unions to be a counter-cyclical force for their members and the local economy is compromised.

This “social compact” aspect is one of the most important public policy reasons for credit unions; that is, credit unions are meant to “be there,” and meet member needs when for-profit firms cannot or will not due to market pressures. Cooperatives are different by design so that members can count on their funds being available, come hell (market cardiac arrest) or high water (Katrina).

Because liquidity is so fundamental for system soundness and today completely undefined, the situation raises a much larger topic of what should be the focus now for cooperative efforts. While waiting for more information on actions taken, it is clear the ultimate issue is more than how many corporates might exist and what rules will finally apply. How could the credit union system have been left so vulnerable at this critical moment in both the country’s and the industry’s recovery? This will be the topic of additional analysis in our weekly Industry Insights, plus a special edition of the Callahan Report looking at all aspects of NCUA’s recent actions.

Is the NCUA Board Helping — or Hurting — Credit Unions’ Soundness?

Submitted by cfilson on September 20, 2010 |

In his book The Age of Paradox, author Charles Handy wrote: Unbalanced self interest can only lead to an environment in which any victory will mean destroying those on who our survival will ultimately depend… The tragedy of the commons, it was labeled, when individual farmers maximized their own short-term use of the common land only to find, that when everyone did the same, the land deteriorated until all grazing failed.(page 89)

On September 16, NCUA assessed credit unions another premium — this one 0.124% of insured shares — to bring an additional $933 million into the NCUSIF. This cash will be added to the NCUSIF’s $9.8 billion currently in cash or invested at the U.S. Treasury. This puts a total of $10.8 billion of credit unions’ funds now in Agency accounts in Washington DC.

It is clear the NCUSIF does not need cash, unlike the FDIC that levied and collected three and a quarter years of future premiums one year ago because that fund was running short of liquidity and is today insolvent. The NCUSIF, on the other hand, is stockpiling cash at an increasing rate and has an operating ratio of over 1.2%. This new premium requires credit unions to expense the transfer today based on projections of possible losses at some undetermined time in the future.

Note that this action has nothing to do with the Corporate funding and the earlier assessment — except that credit unions pay all the bills.

The premium decision is a judgment made by the three Board members. There is no automatic formula. There is no consistent trail of information, data or methodology provided by staff. What we do know, however, is that the Board elected to assess the maximum amount allowed under the Federal Credit Union Act, increasing the fund balance to the 1.3% current operating ceiling. The law also explicitly provides an option of assessing any potential fund requirements over the next 8 years. This option was rejected.

So what is the basis for this judgment? What facts were used to support the maximum assessment possible? What is the Board’s track record in looking at staff’s previous reasons from one year ago? And what does the action say about the Board’s view of the credit union system and its role?

The Difference between Loss Estimates and Actual Cash Losses

The most important financial fact to be aware of is that the allowance account is an expense today, for cash losses that may occur in the future. At August 31, 2010, the allowance was $1.172 billion; if this new premium were expensed immediately to add to this reserve—which is the justification for the action—that would immediately bring the total allowance account to over $2.1 billion.

Before this assessment, if one reviews the June 2010 call report data, the existing allowance, if disbursed in cash, would bring every credit union with a net worth ratio of less than 7% up to this well capitalized level, and still leave over $350 million in the account. In other words, every current “problem” credit union would be well capitalized and the remaining 90% of credit union assets would remain above the “well capitalized” level. The critical question is whether the resources already on hand are more than adequate for problem resolution.

#58595B; text-align: left; border: 1px solid #CCCCCC; padding: 15px;">NCUSIF and the CU SystemClick image for larger version.

Since the 1% deposit began in 1985, the fund’s loss experience versus the current allowance level shows that the balance at August 31 is 24 times greater than the NCUSIF’s historical net loss average. The NCUA’s September 16 action almost doubles the ratio, increasing the allowance to nearly 43 times that historical average.

#58595B; text-align: left; border: 1px solid #CCCCCC; padding: 15px;">NCUSIF ReservesClick image for larger version.

Moreover, actual cash losses this year are significantly below the amount in reserves. As NCUA adds to the reserve it reduces retained earnings (net income) thereby creating a declining ratio, which is then used to charge another premium—before the losses are even incurred or known.

#58595B; text-align: left; border: 1px solid #CCCCCC; padding: 15px;">NCUSIF Provision Expense Less Cash LossesClick image for larger version.

Just like some credit unions, is it possible that the NCUSIF is over-reserved? And if so, does it really matter? Wouldn’t we rather be safe than sorry? What if this “abundance of caution” approach is really not the case? Instead, are the Board’s judgments indications of more serious shortcomings which are undermining the system’s future soundness? Is this an example of issues that are troubling many credit unions from their own experiences with Agency examiners?

First the facts. What data were presented to support this decision, and what interpretations were made about that information?

Three quick points of analysis.

  1. One year ago, September 2009, the board approved the first premium assessment since 1992. This action was supported by a staff memorandum which summarized five loss scenarios and the consequences to the NCUSIF. The NCUSIF losses ranged from $80 million to an apocalyptic $15.5 billion prediction. That methodology has somehow been forgotten or lost. No more Treasury stress tests. No more projections of $15.5 billion in NCUSIF losses due solely to natural person credit union problems.

    Those scenarios and alleged risks were and are still widely circulated as proof of serious “hidden” system weakness by individuals within the industry and those trying to scare credit unions into looking at charter change. After all, the data came right from the government—it must be right!

    What happened to this analysis? Why didn’t we see it this year and compare the accuracy of those projections to what we know occurred just twelve months later? Or was this just a bogeyman trotted out to provide color for a decision that was made on another basis? The good news is that the bogeyman summarized in the slide is now off stage.

    2. #58595B; text-align: left; border: 1px solid #CCCCCC; padding: 15px;">NCUSIF Stress Test ResultsClick image for larger version.

  2. One reason given for the premium is the lower earnings available on NCUSIF investments. Interest rates are at one of the lowest levels ever. However, NCUSIF investment income is actually up from $129.8 million in 2009 to $144.9 million for the first eight months of 2010. The NCUSIF yield was 2.21% in January and 2.25% as of August 2010. In addition, the fund is sitting on unrealized gains of $356 million in its portfolio. In 2008, the Fund took gains from early redemptions of investments in December and added over $106 million to revenue—so no premium needed in 2008. So, lower earnings on the portfolio are not a factor. In fact, interest income is right on budget!
  3. Insured share growth, in the words of the memorandum, “adversely impacted the direction of the equity ratio in 2010.” Again, let’s do the math. The current 3.34% share growth equals a net gain of about $24 billion in insured shares. Multiply that by 0.03% and we arrive at a needed $72 million addition to retained earnings. That would account for about 8% of the $933 premium. However, the fund did not recognize the $356 billion in unrealized gains as part of retained earnings—why not just take some gains and offset the growth? That was an action just over a year and a half ago.

The One Issue

The bottom line is that the allowance account’s adequacy is a judgment based on the outlook for potential losses when resolving problem cases.

So how was that judgment made? What facts were offered now that the scenario analysis is no longer the centerpiece.

The primary logic and information used to justify the increased allowance are all based on one assertion—that the credit union system is worse off today than one year ago, or even the year before that. Before looking at the information presented to support this judgment, ask a common sense question:

Could the credit union system actually be worse off today, ready for higher losses than were probable at the peak of the financial crisis? Or even a year ago? Yes, anything is possible; but what do we know from mid-year 2010 data? Is the probability of losses increasing? Or, in fact, has that crisis become so distant that most have forgotten that two years ago America’s financial markets were in cardiac arrest—so that today someone believes the credit union system is headed for higher losses than were probable then or even one year ago?

The assertion that losses are heading higher flies in the face of every macroeconomic data point, not to mention credit union industry trends.  On every dimension of credit union performance, trends are strong and improving. The 2Q Quarterly Report and the in-depth TrendWatch slides show improvements in asset quality, higher coverage ratios, increasing earnings and capital, lower expense ratios.  This is data we can look at, drill down on and, if necessary, call up credit unions and get current information.

So where is the information that suggests this data is not correct? It is from examiner CAMEL ratings. The Agency presented summary information that shows the number of 4s and 5s are up for the year ending June from 291 ($28 billion assets) to 366 ($48.8 billion assets). Code 3 credit unions have gone from 1,485, with $86 billion in assets, to 1,739 and over $149.8 billion in assets in the same time frame.

Are these ratings supported by any objectively available data? Let’s look at the largest 25 problem cases, which reported a collective bottom line loss of $1.14 billion in 2008 at the moment of greatest crisis. What is their status at June 30, 2010?

Year-to-date they collectively report $51 million in net income and their total capital ratio is higher than at yearend 2008. The only one to have failed is Eastern Financial, which was merged—otherwise, their overall asset levels are stable. These were the worst of the worst credit union performers two years ago and are still here, relatively stable and moving forward. (The September Callahan Report provides greater detail.)

The use of CAMEL trends is the most significant aspect of the premium decision. There is no objectively verifiable evidence to support the downgrades in CAMEL assessments. These ratings are themselves judgments imposed on credit unions by examiners. They frequently reflect efforts to force business decisions, to increase reserves above documented methodologies or to demand strategic changes by credit unions from examiners who are being pressured to get tough and show results. In other words, the CAMEL ratings are being used as a regulatory tool not as an objective assessment of financial condition.

That approach, with the resulting CAMEL judgments, is set by the Board. That is where policy is determined in the Agency. The premium is based on a circular pattern of reasoning—we are saying you are declining, therefore you are. The core of the regulatory examination process is integrity and consistency. If that activity is fundamentally distorted what reasonable conclusions are possible with information created to satisfy a supervisory tactic?

Circular reasoning means that the conclusion one is seeking to prove is already contained in the premise to the situation. The premise that the credit unions system is worse off today is not objectively reviewed, but asserted: the system is worse off because we said it is. Therefore, the answer to the question, (premium or not) has already been determined by the process. With two lawyers on the Board, one would have hoped this flawed reasoning would have been self-evident.

One Final Issue: GAAP Made Us Do It

This is the ultimate justification when all other evidence fails. We are merely following GAAP rules. Two quick observations:

  1. Just 90 days ago NCUA released the last two years audits of all the funds. The NCUSIF was evaluated by the outside auditor as having a significant deficiency in internal control over financial reporting in 2009. The major accounting issue in the NCUSIF is the allowance account calculation. All the other numbers are simple addition and subtraction. NCUA has given no indication that its interim statements have been changed to respond to this extremely serious criticism, or if so, how.
  2. GAAP itself rests on judgment backed by verifiable assumptions and methodology. No credit union could defend its allowance accounts to either an auditor or the Agency’s examiners with the generalities used by NCUA. NCUA provides no details of specific losses, (such as how a $250 million apparent Code 1 credit union can disappear and be liquidated in 7 days), and no explanation why the allowance account continually grows above the actual cash losses to a level 43 times the credit union’s historical loss experience from both good times and bad.

(For an explanation of how allowance account estimates change during a crisis, read Mike Sacher’s article on credit union allowance and outdated methodology.)

The Premium and the State of the NCUA

The premium is a Board decision. It reflects their leadership of the Agency. The outcome provides insight into the Board’s temperament, ability to use information wisely, identify key issues and most importantly, an awareness of how their decisions will affect credit unions. The Board memorandum states that “855 FICU’s may experience negative net income for 2010 due to the impact of the combined premium and stabilization fund assessment.” The Board has the data that show their decisions will cause 11% of credit unions to show negative net income—as a result of their decisions. Why exacerbate earnings challenges just as the recovery is underway?

But this is a bigger issue than money. It is about confidence in the judgments of the NCUA Board. 

Sitting on record levels of cash, overseeing an industry showing documented improvement in every indicator of asset quality and performance, watching credit unions provide American consumers billions of dollars of refinancing debt relief that will jump start local economies, the NCUA board took another $1 billion from credit unions. The money sits in an account at Treasury just in case there is a need to further fund an allowance account that is already 24 times greater than the long-term loss rate.

Is this action helping or hurting the soundness of the credit union system? The country’s economic recovery? Or does this stockpiling of cash reflect an Agency so unsure in its own analysis that it requires more cash to solve its own uncertainties?

There will be more opportunities shortly to learn about the Board’s judgments as decisions are announced about legacy assets and the Corporate rule. Will we see more unilateral actions justified with circular reasoning and vague assertions? Or is there recognition that NCUA’s success is a mutual effort based on analysis, methodologies and facts open to all, so that the credit unions which pay the bill and manage the consequences can have confidence in the process? And, most importantly, confidence in the leaders overseeing that process?

There is no longer a safety issue in credit unions—or the country’s financial markets. The crisis is over. The recession ended in June 2009. Rather, this is about sound judgments about the future.

Charles Handy also commented on importance of this alignment of interests in The Age of Paradox: If there is no common cause, no agreement on the longer term goal, the more pressing priority then the most powerful party will win out …in the end for the long term to prevail over the short term, we must want what the long term promises.  Where there is no vision, there you will find short-termism, for there is no reason to compromise for an unknown tomorrow.  (pg 96)

Dodd’s Bill: What You Need to Know

Submitted by ekashner on April 29, 2010 |

Today, debate begins on Dodd’s financial reform bill in the Senate. At first, Senate Republicans worked to block debate on the bill, but have now decided to modify it. While the bill will likely change, here is what we have to go on so far. An update from the Associated Press this morning:



It’s long (1336 pages), it’s confusing, and it’s long. We are not even going to suggest the possibility that anyone has been able to read this thing cover to cover. Do you remember how long it took to go through just 253 pages of proposed corporate rule changes? Luckily, here are some more easily digestible resources to help you make sense of the bill, plus several thoughts on what this might mean for credit unions. I will let Sen. Chris Dodd (D-CT) give you an overview in his own words:



In this short press conference from March 24, 2010, hosted on C-SPAN, Sen. Chris Dodd (D-CT) and Rep. Barney Frank (D-MA) discuss their vision for proposed reforms for the financial sector. It seems likely that we will see some kind of financial reform come out of Congress and land on President Obama’s desk.

(Here’s Part 2, although it does not add much)

Additional resources:

Summary and Implications:

This list is by no means comprehensive, but these are some initial observations in having reviewed the bill and commentary on the bill. I highly recommend that you add a personal perspective below. We want to hear what these proposals mean for your individual credit union.

  1. This bill creates a number of new federal bodies, including but not limited to:
    •    Consumer Financial Protection Bureau
    •    Office of Financial Literacy (under the CFPB)
    •    Financial Stability Oversight Council
    •    Office of Nation Insurance (within the Treasury Department)
    •    Office of Financial Research (within the Treasury Department)
    •    Office of Credit Rating Agencies (within the SEC)
    •    Investment Advisory Committee (to the SEC)
  2. Eliminates the Office of Thrift Supervision. Existing thrifts will be grandfathered into the appropriate regulator (can either be the FDIC, OCC, or the Fed) and no additional thrift charters will be granted.
  3. Clarifies the responsibilities of banking regulators:
    •    FDIC will regulate all state banks and thrifts, and state bank holding companies with assets below $50 billion.
    •    OCC will regulate all national banks and federal thrifts, and national bank and federal thrift holding companies with assets below $50 billion
    •    The Federal Reserve regulates all holding companies with assets over $50 billion.
    •    The NCUA remains unaffected (save exceptions below)
  4. The CFPB has the “authority to examine and enforce regulations for banks and credit unions with assets of over $10 billion.” While only three credit unions would be affected by the current $10 billion dollar limit, there are no guarantees that bar will not be lowered.
  5. The CFPB, it would have the power to regulate “all mortgage-related businesses.” This would seem to suggest that the bureau has power over any mortgage lending credit union or CUSO.
  6. Even for institutions not covered by 4 and 5, the CFPB can “write rules for consumer protections governing all entities – banks and non-banks – offering consumer financial services or products.” The bill further states, “All consumer financial protection functions of the National Credit Union Administration are transferred to the Bureau.”
  7. The NCUA would not have a seat on the Financial Stability Oversight Council. It is unclear whether this is because Congress does not consider credit unions systemically important or does not consider credit unions to be significantly risky. Further, it is unclear whether credit union exclusion from the conversation on systemic risk is a boon or bane for the industry.

Status:

Financial reform currently ranks as the top priority for Congress as the return from recess. There is a sister bill in the House, which, as Barney Frank notes, is extremely similar to the Senate bill (this is why we’ve chosen to focus on just one, as most resources and observations are equally applicable to the other). Both have cleared committee, and will likely receive an up or down vote in this Congressional session. If this happens, reconciliation will likely be a very quick process, and there would be few reasons why President Obama would not sign the combined bill. The main thing to be seen will be how aggressively Democrats push this bill, as they did with health care, and to what extent Republicans engage or block debate.

Begs the Question

Submitted by ekashner on April 7, 2010 |


Originally appeared in USA Today, April 5, 2010
If you can’t read the text: We’ve assessed you a fee to cover your share of our lobbying expenses against reform!

A good question to ask with any lobbying expense: Are the benefits for each member greater than the per member cost?

Another question: How many banks conduct that analysis for their customers?

Are We A Movement, or Are We Just "Tax-Advantaged"?

Submitted by CU_Ninja on April 2, 2010 |

“Fed Reserve Chairman Bernanke made a comment before the Senate the other day and said “Credit Unions are tax-advantaged”.  While this statement is true, it didn’t sit well with me either. Our focus should be educating members on what we DO WITH our profits.  We pay higher dividends and lower rates and fees DUE TO THE FACT that we are a credit union.  Banks could very well do the same thing, but they choose to pay their STOCKHOLDERS, not their customers.”  ~Nathan Wuerch, admitted CU Junkie

 

The other day, I was emailing back and forth with my former boss, Nathan Wuerch. During the exchange, he wrote me back the paragraph above, which really got me thinking about why credit unions are “tax-advantaged”. 

 

As an employee of a credit union, the biggest difference I experience - between credit unions and banks - is culture.  The ideals of helping those of modest means and educating members to better serve themselves financially, is the kind of thing that keeps me going.

 

The key to credit union success though, is implementing programs, products, and services that encompass their fundamental values. Without strong cultural values, credit unions run the risk of becoming nothing more than “tax-advantaged” banks. Expanding on that concept I have created the following equation:

 

 

Principles + Values + Right Attitude = Culture

 

Culture + Positive Actions + Cooperation = Movement

 

While we may never be able to fully convince every single non-member of the credit union difference, we can certainly make sure those who visit a branch know that difference the second they walk in the door. Leaders should not lose sight of this as they struggle with the myriad issues their particular institution faces.

 

The point I’m trying to make is - in the midst of the nation’s economic recovery, our own corporate crisis, the fight to expand MBL, shrinking budgets, and a host of other issues facing credit unions - this is a defining moment for us. We can’t lose sight of the ideals, principles, and behaviors which have made credit unions a movement all along. It’s the people before profits that enabled any tax-advantages we have today, and it’s our continued efforts in helping others, that will ensure it stays that way in the future.

 

 

 

 

 

 

A Letter to the Industry

Submitted by ekashner on March 30, 2010 |

Editor’s Note: At Credit Unions Rising, we often strongly encourage credit unions to actively tell their story, not just of the success of their individual credit union but of the success of the credit union movement. As such, we felt it necessary to direct your attention to both Chip Filson’s letter to the credit union industry and the letter to President Obama. This is your chance to make your voice heard.

Dear Credit Union Executive;

The collective achievement of the credit union system in 2009 was extraordinary. Credit unions reached a new high in loan originations—$271 billion; assisted 20 million borrowers; raised $71 billion in new savings (a 10.5% increase); and added over 1.5 million members.

This performance has been told in bits and pieces. But the consolidated results have not been presented. These overall achievements were often overshadowed by the Corporates’ situation and the real problems facing some credit unions.

Telling the credit union movement’s achievements during the Great Recession is vital. The performance validates Congress’s intention to have a financial alternative that always acts in the member-consumer’s interest in both good and bad times.

May we ask your help in sending the Credit Union Movement’s Annual Report to key decision-makers in Washington, DC?

A printed copy of the Report will be sent to President Obama with a cover letter. If you would like to add your signature to this letter, you can do so here. You may also add any brief comments you would like to include with the letter.

Your efforts during the systemic crisis that dominated the first half of 2009 also are a testimony to each credit union’s character. You knew who you were and what you needed to do to help members.

At this pivotal time in the history of financial services, ensuring that public leaders have the facts about the credit union system is critical. Members trust their credit union, and public media is increasingly talking about the credit union difference.

Building a more cooperative America is what credit unions have accomplished for over 100 years, but never in so consequential a manner as the past year.

Please add your name to this Report.

Chip Filson
CEO & President
Callahan & Associates, Inc.

Creating Opportunities and Creating Jobs

Submitted by ekashner on March 25, 2010 |

How many outstanding member business loans did credit unions report as of December 31, 2009? (Answer at the bottom)

On the back page of the March 22, 2010 issue of Politico  appeared a full-page ad from Goldman Sachs.



The accompanying text reads as follows:

In the U.S., small businesses create over 60% of all new jobs. Which means support for small business is support for the entire economy. That’s why Goldman Sachs has launched 10,000 Small Businesses, a $500 million initiative to provide small business owners with access to the resources they need to grow – like business education, mentoring and, most importantly, capital. More than ever, small businesses are the engines of economic growth. Let’s get them the tools to do what they do best. To learn more, visit gs.com/10000smallbusinesses


The microsite for 10,000 Small Businesses features a variety of resources, including a fact sheet (which is really just a .pdf of the microsite). The campaign is part of Goldman’s history of effective storytelling regarding its various initiatives. This particular initiative and PR campaign is partially necessitated by negative publicity, but that publicity has helped produce a finely honed message that is a good example for other financial institutions who want to tell their own story. The only hiccup to the site is the “News” section hasn’t been updated since November.

By running the ad on the back page of Politico, it is clear Goldman intends to build its brand and improve its image among more politically minded readers, including legislators, regulators, staffers, and others that are politically active.  Credit unions, especially those looking to increase the member business lending cap, may look towards institutions such as Goldman to gauge messages do and do not resonate with those capable of influencing legislation.

Most credit unions cannot replicate Goldman’s campaign, but there are plenty of opportunities to tell the story through local and national media. For example, Mid-Atlantic Federal Credit Union received great coverage in the February 9 issue of the Washington Post. There is definitely a need for small business credit and an interest in hearing about financial institutions that are able to provide it.

The March issue of the Callahan Report provides great examples of a credit union telling its story of small business lending and adding a personalized spin that makes the message more memorable. When other banks would not lend, Los Angeles Firemen’s Credit Union provided Firemans Brew the line of credit it needed to expand operations. In the process, the credit union created life-long members and mavens to help build the narrative of the credit union as an effective small business lender. As David Johnson, COO of Firemans Brew, nicely summarizes:

[Los Angeles Firemen’s Credit Union] are very easy to work with. There is much less trouble than working with a commercial bank and you get a decision quicker. Also there are no access fees, and with a small business like ours, that’s a huge help. In addition, the credit union works hard to support us, comes to our events, and really tries to help. Working with them is a really good fit for us.

Answer: 149,724.

Grassroots Alert, but not the kind you're hoping for

Submitted by ekashner on March 25, 2010 |

The American Bankers Association (ABA) continues its very active lobbying campaign against loosening legislative constraints on credit union small business lending authority. Below is another email circulated on March 25th, encouraging bank executives to write their representatives in opposition of raising the member business loan (MBL) cap.

The ABA has used this strategy several times before. Please refer to our analysis of the last ABA email that we received.

Opposition to credit unions will not stop, so, neither can credit unions. If you believe that ABA’s analysis to be incorrect, or if you believe that the credit union industry can responsibly handle increased MBL authority (as it did for 80 years prior to the cap), then you must push for positive change and continue to tell the story of small business lending at your credit union.


GRASSROOTS ALERT
ABA: Letters Needed to Oppose Including CU Business-Lending Cap Increase in Jobs Bill
ABA today is urging all bankers and bank employees to use its automated system to send customized letters to their House and Senate members, asking them to oppose including a proposal in an upcoming jobs-creation bill that would increase the credit union business-lending cap from 12.25 percent of a credit union’s total assets to 25 percent.

The timing of the jobs bill is uncertain, but the administration’s desire to support the increase is gaining traction in the Treasury Department. The credit union industry has sought to increase the business-lending cap through legislation (H.R. 3380 and S. 2919) in both the House and Senate, and has attempted to include the proposal in previous jobs packages that have passed both chambers.

Despite the fact that only 37 of the nearly 7,600 credits unions — or about one-half of 1 percent — would benefit from a cap increase, many members of Congress, and now apparently the administration, believe that it will help more small businesses get loans. Raising the business-lending cap would primarily help large, nontraditional, growth-oriented credit unions that have abandoned their mission of serving people of modest means, and it would substantially increase such credit unions’ risk exposure. Please send a letter.

GAC10: A Mood Change

Submitted by Paulsworld on February 26, 2010 |

The Washington Convention Center saw a great mood change this year. Spirits seemed higher and the somewhat sober 2009 version became only a memory for those attending.

Maybe the difference was a more hopeful economy as well as the fact that those going up to visit legislators actually had something to talk about and were armed with a member business lending bill. It could have been the distance from the corporate credit union failures or perhaps a determination to pretend that things were somehow better? Whatever the reason the mood was detectably different.

While the mood was improved for those in the seats, those on the stage seemed confused. Dan Mica said his goodbye, yet his board Chair said the resolution thanking him for 14 years of service was too long to actually read. NCUA Chair Debbie Matz continued to sound a warning, while we were told that credit unions were more important than ever by any number of legislators.

Even NCUA Board Member Gigi Hyland, who is very comfortable on stage, had a mixed message. She told us we were a movement, not a stationary bike - meaning we needed to move forward, yet she herself admitted her whitepaper on supplemental capital still wasn’t finished after nearly two years. Not exactly an example of movement.

Dan Mica’s effort to grow GAC was fully on display and may have been the biggest tribute he will ever receive. His success was all around us with attendance of 4,000 and the boast of the largest exhibit hall of any financial services conference.Even the cavernous Washington Convention Center was itself a big sign of Dan’s success.

It was hard not to reflect on Dan Mica’s career at CUNA as people like Paul Kanjorski took the stage. Champions like Ed Royce and even Brad Sherman are also tributes to Mica’s contacts in Washington. Those contacts were Dan Mica’s and his leaving, together with some of these guys getting older and facing difficult election challenges, make it clear that things are changing. While no mention was made of Mica’s replacement, or for that matter the possible replacement of some of our legislative champions, the future is on the way.

This year’s conference saw a steamroller effort to crash the GAC by those pushing a youth or die agenda. Thanks to CUNA they got 20 free admissions for young people, some not even credit union employees, but for most in attendance their efforts were either misunderstood or unknown.

While the youth agenda was being pushed in the conference hall, the old fashioned cyber café complete with clanking big box pc’s was barely being used in the lobby. It didn’t seem to occur to CUNA staffers that most people walk around with more computing power and connectivity in their hands than in a room full of hardwired internet connections. Maybe the future will bring the idea of free wifi for attendees. This was just another symbol of the change that needs to come.

To me GAC10 was a series of contrasts. An old world of past practices and the success of Dan Mica, an outdated cyber café and warnings and slow moving regulators on one side. On the other side we had praise from legislators for helping America, a hope for a more united future as new leadership takes CUNA forward and a small seed of a more youthful group of attendees. Times are changing and GAC10 was a study of these old and new issues.

Paul Stull is a featured author for Credit Unions Rising.  He is the Senior VP of Marketing at Arizona State CU; follow him on twitter @Paulsworld .  If you are interested in becoming a featured author, please contact Elliott Kashner at ekashner@creditunions.com.

Re: GAC10: A Mood Change

Submitted by ekashner on February 28, 2010.

Based on what I saw, not only at the GAC, but in speaking with credit unions and others in the industry, there is an incredible momentum behind MBL. However, as we saw last week with the ABA, there is a POWERFUL lobby against it. If the industry is looking for an early win in 2010, MBL seems the most likely place to do it, and may provide motivation for the industry to collectively and actively push for progress in other areas (like alternative capital?).

Re: GAC10: A Mood Change

Submitted by Paulsworld on February 26, 2010.

MBL is the top issue because it actually has been introduced. We will need to watch for further developments on overdraft protection and interchange income. Interchange will likely be slipped in when we aren't looking.

I didn't mention the corporate credit union issues, but while we are told we have input it does not seem that way.

It will be interesting to see where we are one year from now.

Re: GAC10: A Mood Change

Submitted by CU_Ninja on February 26, 2010.

Thanks Paul, for your observations on GAC10. Wish I could have been there. I certainly could feel a sense of excitement from my readings on twitter, albeit most of the tweeps I followed were crashers.

Based on your attendance at GAC10, what would you say is the sense of direction for the CU movement going forward? Will MBL be the mantra for 2010, or is there something else that non-attendees should be aware of?

Letter to NCUA: More Comments on Proposed Corporate Regulations

Submitted by evan59 on February 26, 2010 |

Mary Rupp
Secretary of the Board

National Credit Union Administration
1775 Duke Street
Alexandria, Virginia 22314-3428

Dear Ms. Rupp, 

I applaud the NCUA for their leadership in the solution of the corporate credit union issues.  I have completely read through the proposed corporate regulations and although I believe they have merit I see several areas for concern.  The most important area of concern regards credit evaluation of the collateral underlying investments the corporate credit unions may consider for purchase.  My concerns in this area are so great that I have forwarded a separate letter to you regarding this topic.  I cannot overemphasize my concerns about the inappropriateness of NCUA’s approach to credit evaluation in the proposed corporate regulations.  That said here are the other areas of concern I have. 

Too much emphasis on NEV for ALM monitoring without guidelines for how NEV assumptions will be reviewed.  NEV is a very easily manipulated ALM monitoring tool.  If NEV is to be used as a measure of interest rate risk then guidelines for evaluation of the underlying NEV assumptions should be outlined.  Again, NEV is a very easily manipulated. 

No guidelines for testing Net Interest Income (NII).  NII is a much more effective tool for measuring interest rate risk than NEV.  And yet scant mention is made of NII and again there are no guidelines for its proper measurement. 

What exactly is an instantaneous spread widening?   A clear definition, (if that’s possible) needs to be put into the regulations of what instantaneous spread widening is. 

The average life of two years limitation on investments will effectively prevent corporates from buying mortgage backed securities because the average lives of these securities are affected primarily by interest rate changes.  If interest rates rise the average lives of the investments they buy will extend.  Will they then be forced to sell the bonds at a potential loss in an adverse market environment?  (Can you say CapCorp?)  Instead of MBS’s they will be forced to buy asset backed securities.  If  the credit of the underlying collateral has been properly reviewed MBS’s would be safer assets from a credit basis than asset backed securities because it is credit issues that typically affect the average lives of asset backed securities. 

Related to the average life of two years issue, there is no differentiation between variable rate and fixed rate MBS’s.  Even though the average life of a variable rate MBS will extend when interest rates rise, the return on the bond also increases thereby improving the holding entity’s bottom line and helping to maintain the NII position of the corporate. 

With expanded authority the corporates would be able to invest in all sorts of foreign assets.  Why does a corporate need to do this?  Is there anyone on staff at a corporate that has the expertise to evaluate such investments?  I would delete this part of the proposed regulations. 

No one from staff of a trade association should serve on the Board of a corporate.  This should be included in the proposed regulations.

On page 59 of the commentary of the proposed regulations there is discussion of long term investments that can be rated one grade below investment grade.  First of all, the ratings of the rating agencies should not be used to adjudicate appropriate investments for corporate credit unions and secondly, no investment, even if it is a traded position, should be one grade below investment grade. 

The approximate average life mismatch of .25 years described in pages 87 and 88 of the proposed regulation commentary is too restrictive for a corporate to make sufficient margin to cover operations. 

On page 100 of the proposed corporate regulation commentary there is a chart that shows corporate credit unions’ liabilities with a spread to LIBOR of zero.  This is a totally unrealistic assumption.  No credit union will invest at their corporate at LIBOR flat.  This fallacious assumption brings into question NCUA’s assumption that corporates can operate profitably under the restrictions in the proposed corporate regulations.  And by inference it brings into question the corporate credit unions’ ability to raise the amounts of retained earnings required by the new corporate regulations. 

These are my thoughts on the major areas of concern I saw.  I hope that many people take the time to read the corporate regs and draw their own conclusions.  The collapse of the corporates will affect the bottom line of every credit union for years to come.  Just on this basis it is essential to the credit union industry that the corporate credit unions be regulated by regulations that prevent this from happening in the future.  I do not believe the proposed regulations meet that standard. 

Sincerely,

Evan Clark
CEO
Department of Commerce Federal Credit Union

Evan Clark is a featured author for Credit Unions Rising.  He is the CEO of Department of Commerce FCU and writes for his personal blog atevanblog.com.  If you are interested in becoming a featured author, please contact Elliott Kashner at ekashner@creditunions.com

Re: Letter to NCUA: More Comments on Proposed Corporate ...

Submitted by CU_Ninja on February 26, 2010.

Thanks Evan, for sharing your letter. You actually helped me better understand a number of issues that I had questions on relating to this somewhat complicated proposal.