Posts filed under ‘Advocacy’
Having waved my family goodbye on Friday morning as they headed off to Ocean City Md. I was a man alone with his thoughts and no blog to write so when I read the CU Times article reporting on NCUA’s listening tour stop in Chicago I could do nothing but explain RBC reform to my dog. I’m pretty sure he just wanted to go for a walk. Here is what I told him.
–It’s good news that chairman Matz affirmed NCUA’s decision to extend the 18 month phase-in period for RBC reform even if she couldn’t resist lapsing into exasperated school-mum mode when she predicted that “no matter how long we extend it will never be enough.” The Chairman is half right: Some credit unions won’t be happy until the effective date is” sometime after when Hell freezes over.”
But she shouldn’t be too dismissive. Eighteen months is too short a period to make the necessary capital adjustments; train key staff; review investment policies and make sure vendor software is up to speed. I personally would give credit unions three years to be in compliance with these regulations so that the most impacted institutions can actually choose between cutting their balance sheets and growing to meet enhanced capital demands. But hey I’m just a middle-aged guy with a hyper dog.
Personally I’m as concerned with implementing a phase in period for credit unions currently below the $50 billion threshold than I am pushing back the effective date. Since credit unions that reach $50 billion are immediately required to operate under the RBC framework, growing credit unions have to start adjusting their practices long before RBC officially applies to them. Some credit unions have suggested a phase in period for institutions that reach the magic number. NCUA should also consider raising the threshold. It’s in no one’s interest for a credit union to slow down its growth simply to avoid the RBC framework,
–Chairman Matz described as “a myth” the contention of the trades that RBC reform will force credit unions to raise $7 billion. She explained that “more than half of all credit unions subject to the rule would have a buffer of at least 3.5% or even higher than they do today”
Do I note a change in emphasis? What happened to the statistic about over 90% of credit unions being in compliance with the proposal so it’s really no big deal? As I explained in a previous blog NCUA is the only financial regulator implementing Basel III reform that hasn’t informed its financial institutions that it expects them to have capital buffers well in excess of being well capitalized. Even if NCUA decides not to push individual credit unions to raise their buffers credit union boards will. Many more credit unions are impacted by this proposal than NCUA originally suggested.
–Matz said that it was not the NCUA’s intent to provide examiners with the independent authority to raise capital requirements. You could have fooled me. The agency plans to re-write this portion of the proposal. This is good news but the devil is still in the details. NCUA’s proposal to authorize customized RBC requirements for specific credit unions should be scrapped completely. If it isn’t willing to do that it should develop objective quantifiable criteria for determining what credit unions would be subject to these customized plans.
–The RBC proposal is morphing from a regulation into a Rorschach test with regulators assuring the industry that the proposal doesn’t do what it says it does and\or is going to be amended to make necessary changes. This is a proposal that isn’t ready for prime time and a subsequent comment period would give stakeholders the ability to comment on the type of technical issues that are more typically addressed when regulations are proposed.
Besides it will keep me from muttering at my dog.
Nothing at all to do with credit unions but unless my eyes and ears deceived me there was a commercial in the run- up to the World Cup final yesterday for a movie coming out “this holiday season” in November! I Want a law banning holiday advertisements before November 20th. Otherwise marketers are going to suck the joy out of the holiday season. First Amendment be dammed.
It wasn’t all that long ago that debt collection law firms in New York would literally inundate credit unions with information subpoenas seeking to track down debtors without any regard for whether or not a credit union would realistically have such information. After all, chances are a single SEG credit union for telephone workers in Binghamton isn’t going to have an account for a debtor in Manhattan. These large scale fishing expeditions were just a cost of doing business to these firms, but to credit unions they were imposing huge operational burdens since every subpoena required a response. Today, the law isn’t perfect but New York’s existing statute, improved by amendments resulting from credit union lobbying efforts, have reduced this huge operational burden.
Why the trip down memory lane? Recently, an information subpoena that was sent to a credit union demonstrated that the law must be working because debt collecting lawyers are trying to do end runs around it. Let’s make sure they don’t get away with it.
First, a refresher course, with apologies to those of you who handle these things on a regular basis. When used properly, information subpoenas are an important means of getting money from people who haven’t paid off a debt. They can be issued by attorneys acting in their legal capacity. But there are several conditions that must be met for a subpoena to be valid. First, unless both parties agree to accept subpoenas in electronic form, an information subpoena must be accompanied by a “copy and original of written questions and a prepaid, addressed return envelope. Service of an information subpoena may be made by registered or certified mail, return receipt requested. Answers shall be made in writing under oath by the person upon whom served.” (N.Y. C.P.L.R. 5224 (McKinney)).
Second, it has to include a signed certification from the issuing attorney that she has “A REASONABLE BELIEF THAT THE PARTY RECEIVING THIS SUBPOENA HAS IN THEIR POSSESSION INFORMATION ABOUT THE DEBTOR THAT WILL ASSIST THE CREDITOR IN COLLECTING THE JUDGMENT.”
Finally, attorneys who send out more than 50 subpoenas a month must maintain for five years records detailing the basis of their reasonable beliefs. Failure to do so can get them sued by the AG. If this is valid, then an attorney could circumvent virtually all the law’s requirements by bulk mailing subpoenas with an accompanying certification cover page.
Nice try fellas, but I don’t think this is kosher. First, there is no provision in the statute allowing the certification requirement to be waived except for authorizing subpoenas to be sent electronically with the consent of the party to be served. It’s quite a stretch to suggest that the certified mail requirement can be waived for any other reason.
In addition, since a party receiving a valid information subpoena is obligated to respond, suggesting that their signature waives the certification requirement is awfully close to making an offer that can’t be refused. (“Either your blood or your signature is going to be on this contract” but – with apologies to those of you who haven’t watched The Godfather – I digress).
So what should you do if you receive one of these subpoenas? If you get a subpoena with this waiver request, I would cross out the offending sentence, initial the change and answer the subpoena subject to your amendment. Otherwise, you may be paving the way for bulk mailings of uncertified mail. In addition, remember the subpoena has to include the attorney’s good faith assertion, otherwise place it in the garbage. Last, but not least, send a copy of questionable subpoenas to the Association. My boss, Mike Lanotte, gets almost as fired up about protecting credit union advances in this area as he does about his Mets actually playing well, and if we see abuses taking place we will bring them to the attention of the right people.
Bond buying to end by October
Here are the minutes from the last Fed meeting. The big take away is that the bond buying program will be done by October.
See you Monday.
In a recent interview, President Obama suggested that what the country needs is more banking reform. Speaking on MarketPlace Radio last Wednesday, the President was asked whether Dodd-Frank had worked since mega banks are as big as ever? After going through the usual litany of Dodd-Frank accomplishments – i.e., the CFPB and so-called “living wills,” as well as increased capital requirements, the President changed his tone:
“Here’s the problem, the problem is that for 60 years, we’ve seen the financial sector grow massively. Now, it’s a great strength of our economies that we’ve got the deepest, strongest capital markets in the world, but what has also happened is that as the financial sector has grown, more and more of the revenue generated on Wall Street is based on arbitrage — trading bets — as opposed to investing in companies that actually make something and hire people. And so, what I’ve said to my economic team, is that we have to continue to see how can we rebalance the economy sensibly, so that we have a banking system that is doing what it is supposed to be doing to grow the real economy, but not a situation in which we continue to see a lot of these banks take big risks because the profit incentive and the bonus incentive is there for them. That is an unfinished piece of business, but that doesn’t detract from the important stabilization functions that Dodd-Frank was designed to address.”
Now, to be clear, politics being politics the White House quickly got out the word that the President’s comments didn’t mean that another push for banking reform was on its way. And there was speculation as to whether the President actually meant what he said or if his comments were simply intended to preempt criticism of Dodd-Frank in advance of its upcoming anniversary.
But the President’s comments reveal an inconvenient truth of which anyone who has tried to implement Dodd-Frank is aware: Congress and the President have done precious little to prevent another financial crisis. The too big to fail banks are still too big and with finance taking on an increasingly important role in the economy as a whole, reform of the banking system – such as reinstating boundaries between investment and commercial banking – are now all but impossible to achieve. The President had his chance, and he did not go far enough. For my money, it will go down as the greatest failure of his Presidency,
Unfortunately, credit unions are still left with the financial burden of complying with Dodd-Frank inspired mandates that are making it increasingly difficult for them to provide the types of products and services that got them into the business in the first place. In the meantime, the reality that major banks are “too big to fail” does give them a competitive advantage over their smaller counterparts. To steal a favorite political metaphor, the banks went through the car wash with the windows down and credit unions got wet.
True banking reform is not going to happen, but maybe, just maybe, with both Republicans and Democrats criticizing aspects of Dodd-Frank now’s a good time to push once again for mandate relief. At the top of my list would be an outright exemption from Dodd-Frank mortgage requirements for all credit unions. There is no evidence that credit unions caused the financial crisis, yet there is lots of evidence that Dodd-Frank is increasing costs for credit unions. There is also no good reason why credit unions should have to bear the costs for institutions that Congress doesn’t have the stomach to truly regulate.
The government reported stronger than expected job growth in June with the economy adding 280,000 new jobs. In addition, the growth was spread over a large cross-section of industries providing the best evidence yet for those of you who see the economic glass as half full. About the only negative I could find in the report is that the workforce participation rate was unchanged. People are already arguing that the jobs report is a signal that the Fed should move up its timeline for raising short term interest rates. There are some great arguments for why this approach is short sighted, but the blog has already gone on longer than I wanted.
Good luck making it through today after a nice long weekend. My advice: more coffee – lots and lots of coffee.
NCUA has proposed important changes to its Chartering and Field of Membership Manual regarding how and if an Association qualifies for inclusion in a credit union’s field of membership. I know many of you have put in yeoman’s work responding to NCUA’s risk-based capital proposal and find the idea of taking a look at this proposed regulation about as tantalizing as a follow-up visit to the dentist to get a cavity filled, but there are some important issues at stake and more of you may want to comment before the June 30 deadline.
NCUA is concerned that some credit unions are forming associations for the primary purpose of gaining access to new members. In its own words, “As a threshold matter, when reviewing an application to include an association in an FCU’s FOM, NCUA will determine if the association has been formed primarily for the purpose of expanding credit union membership. If NCUA makes such a determination, then the analysis ends and the association is denied inclusion in the FCU’s FOM. If NCUA determines that the association was formed to serve another separate function as an organization, then NCUA will apply the totality of the circumstances test to determine if the association satisfies the associational common bond requirements.”
There are two basic problems with this approach. First, while NCUA has a list of criteria – which it is adding to under this proposal – to determine if a credit union meets the associational common bond requirements, the regulation provides precious little suggested criteria about how NCUA will determine if a perfectly valid association was actually formed for the purpose of increasing membership. This is another example of NCUA seeking to give itself the authority to substitute examiner judgment for the plain language of the regulation on a case-by-case basis. Second, so long as an association is a valid, legal entity separate and distinct from a credit union, the motivations of a credit union in helping to form it are irrelevant. If a credit union forms an association to Save the Amazon Rainforest, provide aid to service members, or to lobby for a moratorium on any new reality TV shows – I am a charter member of this one, so long as these associations actively further these goals by holding meetings and sponsoring events, communities are benefitting.
Right now the tireless gadfly and blog devotee Keith Leggett is one of only six people to have commented on this proposal. Even if you disagree with me, please take a look at this proposal and consider dropping NCUA a line or two if, like me, you think it is going to have important consequences for the industry.
Credit Unions Hit Hard by Target Breach
The Target Breach provided fresh evidence for why Congress and State Legislatures have to re-examine the way liability is allocated between merchants and card issuers for data breaches. Despite the fact that card issuing credit unions and banks in no way contributed to causing the Target Breach, financial institutions, particularly smaller ones, were hit hard financially by the theft, according to a report released by PULSE yesterday. The report also indicates that more and more Americans are using plastic to transact business, meaning that if you haven’t already seen a decline in your debit card income, you will probably start seeing it soon.
On that happy note, enjoy your day.
Greetings from Saratoga Springs! The frenzy that characterizes the final hours of New York’s Legislative Session lived up to expectations again this year. In fact, the Senate is expected to reconvene this morning to pass some additional measures. Here’s a look at some of the key legislation that may impact your credit union’s operation. Remember that none of these bills have been signed by the Governor yet.
- A9408/S7112 Field of Membership Bill: This bill gives state chartered credit unions more flexibility in developing their fields of membership. For example, an employee-based credit union would be able to apply for permission to extend membership to persons who live in the community in which it operates. Similar legislation was vetoed last year by the Governor. This year’s bill was amended to address the Governor’s concerns. For example, any membership modifications are subject to the approval of the Department of Financial Services. I’m sure I’ll be telling you more about this bill in the months ahead.
- A9037-a/S6905-b Prize Linked Savings Program: This bill passed both Houses earlier this session and allows credit unions and banks to offer lotteries as an incentive to open savings accounts. The initiative has been successful in other states and, if it is approved by the Governor, may provide innovative ways of encouraging people to invest their lottery money rather than throw it away.
- A8106-c/S5885-b Modifications to the Wage-Theft Prevention Act: One of the most obnoxious mandates New York State has imposed on employers in recent years is the requirement that they provide employees with an annual written notice of their salary. In the closing hours of the Senate, common sense prevailed and a bill was passed eliminating the annual notice requirements. Great job by the Legislature for being willing to take a second look at one of its laws.
- S7119/A9354 Pre-Foreclosure Settlement Conferences: Since 2009, New York has mandated that lenders attend pre-foreclosure settlement conferences to work with members with delinquent mortgages before foreclosing on their property. Theoretically this bill was passed in response to the mortgage crisis. However, the legislature approved legislation extending the expiration of this requirement until 2019. Suffice it to say that these conferences have become a permanent part of the New York lending landscape.
- A6357-e/S7923 Medical Marijuana: Yesterday afternoon, the Legislature and Governor came to an agreement permitting the use of medical marijuana under extremely controlled circumstances. Most importantly, marijuana cannot be smoked but must be taken in a tablet or vapor form and can only be prescribed for certain illnesses. I’ve done a couple of blogs this year about the legal issues confronting credit unions in Colorado and Washington State that open up accounts for pot-selling businesses. At this point, it appears that New York’s legislation is so narrowly focused — only five businesses with up to four satellites each will be authorized to sell the pot — that it doesn’t seem to raise wide-spread compliance concerns for financial institutions. However, I’m basing this on comments from yesterday’s press conference as the ink is hardly dry on the final bill. The Senate is coming back to pass it this morning.
- S7224/A9539 Subprime Loan Threshold: This bill makes a highly technical and narrow exception to the way New York State determines if a loan is subprime. The FHA now mandates that the cost to a consumer for an FHA-backed mortgage loan be amortized over the life of the loan. This has the effect of raising the cost of the loan. The Department of Financial Services has been passing temporary regulations exempting this increase from the calculation of subprime loans. This legislation simply codifies that action.
- A8955-a/S6682-b Permits Parents/Guardians To Impose Credit Freezes on Minor Accounts: This bill clarifies that parents and guardians have the right to obtain credit report freezes on behalf of minor children. The sponsor memo indicates that the identity theft of minor accounts is an increasing problem.
Hope to see you walking around today’s convention. Have a great day.
The single biggest shortcoming of NCUA’s pitch for its risk-based capital proposal is its unwillingness or inability to articulate why it feels reform is necessary at this time.
I know, I know; some credit unions made bad investments, some made bad loans and these incompetent malcontents did this — or so NCUA believes — despite the clairvoyant predictions of doom by well-meaning examiners, who like the stars of those 1970’s disaster movies, were powerless to prevent the imminent calamity. If only Jack Lemon were alive he could play an NCUA examiner predicting that the whole industry was about to blow up.
Leaving aside NCUA’s somewhat self-serving view of history (were examiners really telling corporate credit unions they were headed for disaster and telling natural person credit unions that their corporate capital was at risk and I just missed the memo?), these are hardly the type of systemic problems that justify imposing system wide constraints on an industry. As the latest summary of credit union performance results shows, this is hardly an industry that has a capital problem — instead it is an industry making commonsense decisions given the economic environment in which it finds itself.
No doubt Chairman Matz had NCUA’s RBC proposal on her mind when she lead off NCUA’s press release summarizing the latest credit union quarterly results by commenting “The continued growth in credit union lending and gains in membership during the first quarter are positive signs . . . Investing in people and communities will produce dividends for credit unions in many respects, but the higher interest rate environment of late 2013 and the first quarter of 2014 slowed mortgage originations. To protect the Share Insurance Fund, NCUA continues to closely monitor the risks posed by rising interest rates, long-term investments and fixed-rate mortgages.”
Therein lies the rub. I look at these statistics and see an industry that is cautiously but logically creeping toward higher yielding longer-term investments, where Chairman Matz sees a risk that needs to be “weighted” against. Why are credit unions acting logically? Because they have more money to invest than they want and are seeking the most money for their members’ funds. There are only a relative handful of credit unions with strong loan to share ratios and if the economy, as seems likely, continues to slog along for the foreseeable future, there simply isn’t much of a risk that credit unions will have to turn away potential borrowers because of a lack of liquidity. Conservatively speaking, NCUA has been warning about interest rate risk for more than a decade. At some point, legitimate examiner concerns become the white noise of Chicken Little.
I’m not minimizing interest rate risk; it is a risk that is always present for any financial institution. What I am questioning is whether the current environment is so unique and the investment decisions being made en masse by credit unions so reckless as to justify risk-based capital reform designed in part to discourage longer term investments and lending products beyond certain concentration thresholds. NCUA has already forced credit unions to develop more detailed interest rate risk management strategies. Examiners have the authority to make sure that individual credit unions are taking the steps to manage interest rate risk properly given their unique set of circumstances.
Finally let’s look at mortgages. Originations are tumbling not only because the refinancing boom caused by historically low interest rates has ended, but also because Dodd-Frank imposed mortgage underwriting requirements have made it more difficult for many first-time homebuyers, many of whom are saddled with gobs of student loan debt, to justify the expense of getting a house and having the credit profile to qualify for a mortgage. This actually represents a growth opportunity for credit unions that can fill a gap caused by retreating banks for which more individualized lending decisions simply aren’t cost effective. Let’s let individual credit unions respond to this unique marketplace in the way that best meets the needs of their members and the underlying strength of the communities in which they live. Unfortunately, by categorically assuming that mortgages above certain concentration thresholds are bad for the industry as a whole, NCUA’s RBC proposal would deny certain credit unions the flexibility they need to make their own lending decisions.
This brings us back to NCUA’s rationale for RBC reform. The Share Insurance Fund must be protected at all costs, or at least that’s the way Chairman Matz is interpreting her mandate. Just take a look at the rising net worth of credit unions. On what basis can you conclude that this is an undercapitalized industry? Perhaps NCUA feels that it has the obligation to guard against any risk by any credit union that could result in a conservatorship, thereby causing a loss to the Share Insurance Fund. This means that the best run credit unions are going to be to subject to capital restraints to guard against the excesses of their most incompetent peers. It’s a recipe for an industry not to grow and not to be able to meet evolving member needs or appropriately react to unknown financial risks just beyond the horizon.
But at least the Share Insurance Fund will be in pristine condition.
While Washington dithers over what to do about patent trolls, the State of Vermont has provided a roadmap for Attorneys General across the country to at least cut back on those threatening letters so many credit unions have received alleging that they are in violation of a patent.
A classic Patent Troll is a company and/or law firm that buys patents and then seeks to make money off them by pressuring alleged patent violators to enter into licensing agreements for continuing to use the technology. New York State credit unions are familiar with this practice by virtue of letters received a couple of years ago, alleging that ATM technology they were using violated a patent and telling them to enter into a licensing agreement or face litigation.
While there is no law against aggressive enforcement of patents, the State of Vermont won an important legal victory in April providing a basis for taking action against these companies. Specifically, the State’s Attorney General is being allowed to sue a patent troll in that state by alleging that a series of letters alleging patent violations and demanding licensing agreements amounted to a violation of the State’s consumer protection law’s prohibition against deceptive practices. States across the country have similar statutes. The CFPB also has the right to sue over deceptive practices and I can’t see any reason why the same legal principles being applied in Vermont could not be used by the CFPB to crack down on patent trolls on a national scale.
The Vermont case involved several companies and one Texas law firm which sent a series of three increasingly aggressive letters to businesses throughout Vermont. These letters claimed, among other things, that most companies were interested in entering into lawful licensing agreements costing companies a mere $900 each; that a business’s failure to respond to a letter notifying them of the alleged violation amounted to evidence that the company knew it was violating the patent; and a threat that if it did not obtain a license it would be sued for the alleged patent violation.
Last year, Vermont sued the company making several claims ultimately questioning whether the defendant made truthful assertions in its letters and questioning the Troller’s due diligence in threatening to sue these Vermont companies. For example, the AG alleged that (1) defendant did no due diligence to confirm whether the recipients were likely infringers and (2) said that the Defendant targeted small businesses in commercial fields unrelated to patent law. Based upon these alleged misrepresentations and falsehoods, the State contends that Defendant sent the letters in bad faith. (Vermont v. MPHJ Tech. Investments, LLC, 2:13-CV-170, 2014 WL 1494009 (D. Vt. Apr. 15, 2014).
The patent troll moved to dismiss the case on jurisdictional grounds claiming that since the lawsuit involved federal patent questions it should be heard in federal court. In addition, it claimed that the firm could not be sued under Vermont state law.
The good news is that the federal district court ruled the case could go forward in state court. This does not mean that Vermont will ultimately win the case but the patent troll model works only when attorneys can cost effectively get settlements in the form of licensing agreements. If taxpayer funded AG’s have the right to sue over their practices, that model goes out the window.
Hopefully we will see other states taking a look at the Vermont experience. If they follow its lead, credit unions will get some much needed relief from a patent system run amuck.
When virtually every member of the House of Representatives signs a letter raising substantive concerns about one of your regulations, you can bet regulators take crafting an appropriate response seriously. So, I am bemused, confused and more than a little concerned by the NCUA’s response to Congressman King’s letter about NCUA’s risk-based capital proposal. Specifically, the NCUA’s position on capital buffers.
Remember NCUA has always argued that with over 90% of affected credit unions already “well capitalized” under its RBC proposal, most credit unions won’t be impacted. In contrast, the trades have argued that NCUA has overlooked the fact that many well capitalized credit unions will lose a good chunk of their capital buffers since most credit unions like to be well above a 7% PCA threshold.
In reality, we now know that NCUA doesn’t think buffers are all that important. Chairman Matz explained that she was “very concerned about the dissemination of misinformation about the costs of the proposed rule.” She went on to explain why these disseminators of risk weighted propaganda were so misguided:
“In reality, the decision whether to hold a capital cushion and how large that should be is a business decision that each credit union makes. I emphasize that the proposed rule does not require credit unions to maintain any specific capital cushion above the regulatory minimum standard for being well-capitalized.”
Wow. If NCUA’s position is that the maintenance of cushions of capital buffers to maintain well-capitalized status doesn’t raise safety and soundness concerns, then the agency is taking a position on examiner oversight vastly at odds with other financial regulators who are also implementing risk-based capital rules. For example, in the preamble to its final risk-based capital rules this past October the OCC explained:
“Consistent with longstanding practice, supervisory assessment of capital adequacy will take account of whether a banking organization plans appropriately to maintain an adequate level of capital given its activities and risk profile, as well as risks and other factors that can affect a banking organization’s financial condition, including, for example, the level and severity of problem assets and its exposure to operational and interest rate risk, and significant asset concentrations. For this reason, a supervisory assessment of capital adequacy may differ significantly from conclusions that might be drawn solely from the level of a banking organization’s regulatory capital ratios.
In light of these considerations, as a prudential matter, a banking organization is generally expected to operate with capital positions well above the minimum risk-based ratios and to hold capital commensurate with the level and nature of the risks to which it is exposed, which may entail holding capital significantly above the minimum requirements.”
Source: Regulatory Capital Rules: Regulatory Capital, Implementation of Basel III, Capital Adequacy, Transition Provisions, Prompt Corrective Action, Standardized Approach for Risk-weighted Assets, Market Discipline and Disclosure Requirements, Advanced Approaches Risk-Based Capital Rule, and Market Risk Capital Rule, 78 FR 62018-01 pages 62042-62043.
Let’s take NCUA at its word. Since one of the primary reasons for risk-based capital was to put credit union capital standards more in line with banks, then why is NCUA adopting an approach toward safety and soundness so at odds with that of the other financial regulators? Is it really NCUA’s position that if an examiner spots a well-capitalized credit union with a noticeably decreasing capital cushion that credit unions can simply tell the examiner it is none of her concern? Somehow, I doubt it, and I hope the Chairman takes the time to explain her response when she meets with credit unions over the summer.
In theory everyone agrees that smaller institutions don’t need to be subject to the same regulations as larger ones. In practice, it is often difficult to determine where to draw the line between big and small institutions and determine which regulations the small guys don’t need to comply with.
A recent speech by Federal Reserve Board member Daniel K. Tarullo is getting a lot of attention, at least among those of us who spend time analyzing banking regulations. The speech is important because he lays out a framework for policymakers and regulators to use in determining which regulations should be imposed on what institutions. Although his framework deals with mandate relief for community banks, the issues he raises are just as pertinent to credit unions.
Reviewing the issue of regulatory burden from the perspective of a former law school professor, he argues that, prior to the financial crisis, financial institutions irrespective of their size were basically all treated the same for regulatory purposes. In addition, the focus of regulators was narrowly tailored to commercial banks with the result that institutions such as Lehman Brothers were subject to less regulatory oversight than was a typical community bank.
Fast-forward to the present day and Dodd-Frank is the first major piece of banking legislation to recognize the need for regulating not only banks, but all institutions that have a systemic impact on the nation’s financial system. In addition, regulators shifted their focus from institutional regulation to financial risk writ large.
However, Tarullo feels that much more needs to be done to determine what regulations need to be imposed. He argues for a system where “the aims of prudential regulation for traditional banking organizations should vary according to the size, scope, and range of activities of the organizations. By specifying these aims with more precision, we can shape both a more effective regulatory system and a more efficient one.”
This standard has both plusses and minuses for the credit union system. Simply put, credit unions do not pose a systemic risk to the nation as a whole and needn’t be subject to regulations designed for larger institutions. For example, Tarullo would grant mandate relief to institutions with less than $50 billion in assets. So does this mean that credit unions should be subject to no regulations? Of course not, but it does mean that NCUA shouldn’t import models, such as the Basel framework, intended to regulate the conduct of much larger interconnected institutions and try to impose them on credit unions. If NCUA wants to talk about systemic risk as a justification for its regulations, then it has to show credit unions are interconnected in a way that the failure of one would bring down others.
What about the post Dodd-Frank consumer lending regime? Again, ask yourself what is the aim of the legislation? If its aim is to prevent perceived abuse of consumers then hold those institutions — be they banks or brokers — that committed the systemic abuse to a higher standard. Instead, the CFPB grants mandate relief only to institutions with $2 billion or less in assets that comply with certain conditions.
A look at the aims of regulation also gets us beyond the dichotomy between big and small institutions. The increased compliance burden being imposed on financial institutions of all shapes and sizes is in some instances a legitimate cost of doing business. For example, today’s cyber system is only as safe as its most vulnerable entry point. Smaller institutions are going to be under more examiner scrutiny and they should be.
Finally, I hate to see credit unions regulated based on size because it threatens the unity of the industry. But if the goal of regulatory reform is to lessen the burden in as prudent a way as possible, then we should be making commonsense distinctions between the largest institutions and everyone else. NCUA would argue that is already taking this approach. It reduced the regulatory burden on credit unions with less than $50 million in assets and recently finalized stress test requirements that only apply to the largest institutions that have a credit union charter. But still more needs to be done by the agency not only in determining what needs to be regulated but in explaining why it needs to impose regulations in the first place.
According to JD Powers, customer satisfaction with their banks has sky rocketed. As described in this press release “despite ongoing public scrutiny, customer satisfaction with banks is at a record high as banks improve experiences for their customers, reduce problems and create a better understanding of fees.” Objectively speaking, the rise is quite remarkable, growing from a satisfaction level of 763 to 785 on a 1000 point scale.
But not all the news is good for our banking brethren. So called mid-sized banks. which the survey defines as FDIC-insured institutions with between $2 billion and $33 billion in assets, are failing to meet the needs of millennials and minorities, particularly when it comes to online and mobile banking. Here are some of my takeaways, for what they are worth.
- As an industry we love to highlight the cooperative, not-for-profit structure of credit unions, but if the American public is willing to forgive the banks for their misdeed this quickly, then we are fooling ourselves if we think most people care. For the vast majority of members, it comes down to a value proposition and they will go to the institution that provides them the best service whether it’s a for-profit bank, prepaid debit card provider, or credit union.
- The findings pointing to millennials and minority dissatisfaction are consistent with mounting research showing that for the younger generations, as well as the underbanked and immigrant populations, the banking experience is defined through the cell phone. If banks with up to $33 billion in assets are having a tough time keeping up with technological demands, then it shows you how tough a job small credit unions face in attracting the next generation of customers.
- Which brings me to my last point, which is that the preeminence of technology is yet one more reason why we are seeing so many mergers within the credit union industry. Virtually every aspect of the business now requires a baseline of economy of scale and sophistication that only larger or, at the very least, growing institutions can provide.