Posts filed under ‘Economy’
Today brings further evidence that credit unions not only talk the talk when it comes to member value, but walk the walk.
According to an annual survey conducted by BankRate.com about 72% of the 50 largest credit unions offer free checking accounts with no strings attached. An additional 24% of these institutions have free accounts for customers who meet certain conditions. In contrast, according to the survey, only 38% of the largest banks offer free checking accounts, a big drop from the 65% that offered them in 2010.
You want some more good news? Fees at credit unions are a lot lower than those at banks. Overdraft fees are a little less than $6 cheaper and our charges for using an out-of-network ATM are $0.50 to $1.00 cheaper on average.
Banks love to argue that as credit unions grow larger they become indistinguishable not-for-profit competitors. But these statistics show yet again that simply isn’t the case.
On Balance Another Positive Year For Credit Unions
NCUA released statistics for credit union growth in the fourth quarter of 2013 and grudgingly admitted that credit unions ended the year with positive economic returns, even as it continued to warn of interest rate risk. Among the most noteworthy achievements were that loans grew nearly 8% in 2013 compared to 2012. In fact, loan products ranging from auto loans to pay day lending alternatives posted impressive gains last year. As a result, the industry loan to share ratio of 70.9% reached its highest level since 2010.
Now for the bad news. The return on assets stood at 78 basis points, down from 80 basis points at the end of the third quarter and 85 basis points at the end of 2012. NCUA also noted with alarm what it describes as a long-term investment surge.
NCUA has been warning of impending interest rate risk for almost five years now. With the exception of a brief spike in mortgage interest caused by confusion over when the FED would start tamping down its bond buying program, interest rates have remained near historically low levels. In addition, the Fed has given no indication that it plans on raising interest rates any time soon. Eventually, interest rates will rise but every time I hear NCUA warning credit unions of this impending risk, I wonder what NCUA’s alternative investment strategy is for credit unions.
What really caught my eye about the National Association of Realtors’ (NAR)quarterly report on the State of US Housing was not the familiar litany of excuses for why, even though optimists continue to see robust economic growth right around the corner, the housing market continues to underwhelm (the weather was bad, credit is tight and the first time homebuyer isn’t buying, yada, yada, yada). No, what really caught my eye was the Association’s assertion that spiking flood insurance premiums are beginning to take a bite out of housing.
According to NAR President Steve Brown, “Thirty percent of transactions in flood zones were cancelled or delayed in January as a result of sharply higher flood insurance rates,” he said. “Since going into effect on October 1, 2013, about 40,000 home sales were either delayed or canceled because of increases and confusion over significantly higher flood insurance rates. The volume could accelerate as the market picks up this spring.”
If part of what is going on here is political gamesmanship, it’s gamesmanship of the best kind. The Senate has already passed legislation that would delay reforms mandated by the Bigget-Waters Reform Act of 2012. One of the primary goals of the Act is to entice private insures into the flood insurance business by phasing out government subsidies that insurers argue make it impossible to accurately and cost effectively price insurance in areas where it is necessary.
While the argument appeals to the free market guy in me, members of both sides of the aisle are justifiably concerned by the evidence that without amendments to this legislation, individuals who live in areas prone to flooding will see huge spikes in their flood insurance premiums. No surprise then that Congressman Michael Grimm of Staten Island is one of the primary proponents of legislation (HR3511) to keep insurance premiums from rising. It appears that House action on the bill is imminent, but the bill has already faced unexpected delays. At the end of the day, this is one of those bills that shows that ideology won’t trump legislation to help constituents stay in their homes.
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A Failure to Communicate?
I was more than a little surprised when I read Chairman Matz’s speech before CUNA’s Government Affairs Conference yesterday. With some credit union officials describing the Risk Based Net Worth proposal as Armageddon for the industry, I figured Matz would use the opportunity to explain why NCUA feels its proposal is medicine worth taking for the industry as a whole. I was wrong.
Given the fact that the industry itself pushed for net-worth reform for several years before seeing NCUA’s proposal, the agency undoubtedly has some arguments to make in its favor. But its failure to mount any kind of a defense of its idea is becoming a real problem. The proposal itself lacks the kind of detail that credit unions deserve when their regulator puts forward a proposal of this magnitude. Matz’s silence in the face of mounting credit union concerns does nothing to address legitimate credit union jitters on this issue.
I am a transparency kind of guy, so it has taken me a while to decide whether or not NCUA did the right thing coupling its Risk Based Net Worth proposal with a calculator with which you can see how a given credit union would fair under the proposal. On the one hand, the calculator has given individual credit unions and Associations a useful and important tool with which to get a handle on a crucially important but complicated proposal. On the other hand, the proposal is just that and to put out for public viewing the consequences of a proposed rule that suggests that many credit unions are less financially secure than they were just a few weeks ago crosses the line between encouraging public debate and peddling inaccurate information in the name of openness. Put a password on the calculator and let credit unions decide for themselves how much of this information they want to make available to the public and when.
It’s strange and more than a little bit curious to see NCUA’s sudden commitment to transparency. It’s as if President Obama decided to pardon Edward Snowden so he could become the head of the National Security Agency. It wasn’t too long ago that NCUA was making all of North Carolina’s state chartered credit unions undergo separate federal examinations because one of the state’s charters had the audacity to make its CAMEL ratings available to the public. It argued than that if one credit union exposed the Holy Grail of CAMEL ratings, pretty soon other credit unions would be pressured into revealing the same information to their members. After that, the industry, followed closely by civilization, would end as we know it. Things would get so bad that the Russians, led by a Kleptocratic thug, would be allowed to hold the Winter Olympics in one of that country’s warmest locations. Okay, that last one actually happened but you get what I mean.
Perhaps NCUA understands it went a little far in its North Carolina inquisition, but I find it a little suspicious, and at the very least inconsistent, for that same regulator to suddenly put such a high premium on transparency. It wants to let any member of the public take a look at a credit unions finances and get a snapshot of how it would fair under a very rough, dangerously simplistic RBNW formula that is years from taking effect if it ever does. Never mind the fact that the information is of very limited value to the general public at this point. It seems to me that Joe Six Pack or a disgruntled member is more likely to understand a risk weighted number than a CAMEL rating. This is a great example of a little knowledge being a dangerous thing.
Ultimately, confidences belong to the party on whose behalf information is provided. That’s why a credit union should be allowed to disclose its CAMEL rating to whomever it wants. Similarly, let’s password protect the NCUA calculator and give each credit union access to its own information. That way, individual institutions could decide how best to handle the RBNW proposal and NCUA can be satisfied that it has provided industry stakeholders with a valuable tool with which to assess one of its most important proposals.
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With the economy still stumbling along, policy officials, including Fed Chairman Janet Yellen, have stressed that the official unemployment rate is not the only gauge to use when assessing how good a job the economy is doing absorbing people into the workforce. This is a vitally important issue because the lower unemployment the more likely the Fed is to start raising short term interest rates. To me, all you have to do is look at the nation’s historically low level of workforce participation and the number of long term unemployed to realize that this is no time to be raising interest rates. So I was surprised when I read the Fed minutes and accompanying articles pointing out that at least some members of the Open Market Committee think it is time to raise rates. What could they be thinking? A possible answer comes from this passage in the Economist:
“recent research suggests the unemployment rate is saying something important. It’s just that the message is a depressing one: America’s laborr supply may be permanently stunted. If so that would mean that the economy is operating closer to potential—using all available capital and labor—than generally thought, and that there is less downward pressure on inflation than the Fed has assumed.”
Under this depressing view, stunted economic growth is the new normal and the Fed has to be quicker to raise interest rates than would have historically been the case. If it doesn’t, then we will have a sluggish economy with high inflation.
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NCUA’s monthly board meeting was yesterday. Unless you’re planning to liquidate sometime soon, there’s not all that much to get excited about. Have a great weekend – remember to break out the sun screen, jump in the pool and have a barbeque, it’s going to be in the 40s.
Just as James Carville encapsulated the theme of Bill Clinton’s 1992 campaign by reminding people “it’s all about the economy, stupid,” an increasingly strong case can be made that your present and future lending growth is increasingly dependent on how you attract and manage young people.
The headlines in today’s paper proclaim the news that consumer borrowing, as measured by the New York Federal Reserve, shot up to its highest level since 2007. Given the fact that consumer spending drives about two-thirds of our nation’s economic growth, this is good news even if an excessive reliance on debt is what got us into the mess in the first place.
But look a little further behind these results and the lessons become murkier and a little disturbing, as pointed out in an excellent blog post (see below) analyzing the latest numbers on the New York Fed’s Liberty Street Blog . Specifically, people are doubling down on higher education as a means of securing their future and how these educational investments are managed will say a lot about economic growth in the coming years.
As the post points out, there’s been a tremendous amount of attention given to the growth of student loans in recent years, and looking at these numbers indicate why “first, student loans grew the most of any debt product in both periods (in percentage terms). Second, the growth in educational debt, like that of auto loans, is concentrated among the lower and middle credit score groups.”
Student debt is even getting blamed for squeezing the housing market as explained in the article link below from the Albany Business review. The argument being made is that lower credit scores and higher debt are making it more difficult for young people to fuel the mortgage market in their traditional role as first-time homebuyers. The New York Fed’s report adds credence to this theory since originations dropped in the fourth quarter and credit standards are still a heck of a lot tougher than they used to be.
If student debt is such an important component of consumer spending, does that mean that NCUA is right to propose a high risk weighting for student loans? Should credit unions just shy away from the private student loan business completely? Of course not. One of the problems with risk weightings as proposed by the NCUA is that they don’t allow for nuances such as sound underwriting. For example, commonsense would tell you that helping the daughter of a longtime member go to SUNY Binghamton is a better investment than lending to a desperate under-employed kid in her mid-twenties signing up for a for-profit school with a high default rate – but the weightings don’t allow for these types of distinctions.
And let’s keep in mind that today’s struggling college grads are tomorrow’s heirs. As pointed out by a CUNA Mutual Group Analysis, if you don’t go after Gen X and Gen Y, you will missing out on a $30 trillion wealth transfer that is going to take place over the coming years.
By the way, I’m trying something a little different today by putting the links for this post on the bottom of the page as a way of encouraging easy access to the material.
Rising student debt threatens housing recovery
. . .Some day I’m going to fly,
I’ll be a pilot to,
And when I do,
How would you,
Like to be my crew?
On the good ship
Lollipop. . .
Janet Yellen had her political debutante ball yesterday when she gave her first Congressional testimony before the House Financial Services Committee as Chairman of the Federal Reserve Board. Considering that one of the primary goals of a FED Chairman at these events is to informatively speak for hours without actually saying anything, she passed with flying colors. Nevertheless, her testimony underscores the likely continuity of FED policy and its limits. The Good Ship Lollipop has set its course.
Just as Shirley Temple cheered people up for a couple of hours during the Great Depression, the FED Chairman is in the unenviable position of defending FED stewardship of an economy, which on paper is gaining strength, but has yet to gain hold in a way that would benefit your unemployed member struggling to make payments or give confidence to another member who is afraid to start looking for a new house.
In her prepared testimony, Yellen took pains to stress that she fully endorsed the policies adopted by Chairman Bernanke and the Fed’s Open Market Committee. This means we can expect the FED to continue to reduce its bond buying purchases. Don’t read too much into her qualifier that continued reduction in bond purchases is contingent on economic growth. The FED has always given itself this flexibility. Absent a major deterioration of the economy, don’t expect the FED to change course.
While the economy is strong enough to reduce bond buying, don’t expect the FED to increase interest rates anytime soon. Yellen stressed that based on its “assessment of a broad range of labor market conditions, inflation expectations, and readings on financial development it likely will be appropriate to maintain the current target range for the federal funds rate well past the time that the unemployment rate declines below 6.5%.”
This last point is particularly important because Yellen is not only signaling the future direction of FED policy, she is also stressing that given the weakness of the economy, inflation fears do not have to color her decisions at this point.
The bottom line with all of this is that the FED has reached the limit of its influence over positive economic developments. Although the economy dodged a bullet when Speaker Boehner came down on the side of sanity and allowed the House to vote on a measure increasing the debt limit, as this article in the Times this morning demonstrates, there are plenty of warning signs that the economy isn’t out of the woods yet.
Whenever I think of the future of banking and the role that the traditional brick and mortar branch will play, I am reminded of my favorite scene in Monty Python and the Holy Grail where an armless knight challenges another knight to a fight, explaining that his injuries are just “flesh wounds.” In my ever so humble opinion, the fundamental shift away from brick and mortar branching is already taking place. Financial institutions have the option of deciding what impact this development will have on future growth or ignoring it at the risk of saddling themselves with expenses that their more nimble rivals won’t have.
The latest proof of branch declines comes in the form of a report from the financial consultancy SNL, which is getting a lot of play this morning. This report just analyzes bank trends, but it reflects changes that are also impacting credit unions. This analysis shows that in 2013 total bank branch closings and openings resulted in a loss of 1,487 branches. Furthermore, the report points out that even banks that are maintaining branches are reconfiguring them to reduce the average branch size.
Those of you who want to pretend that branch decline is just a myth promulgated by reactionary bloggers should read this post by The Financial Brand, which suggests that the number of branch closings has in fact stabilized, but even if one wants to rely on this more sanguine analysis, the number of credit union branches still declined last year.
Supporters of the branch argue that the dramatic decrease in branches over the last several years is primarily a result of the economic downturn, as the economy gets better, things will get back to normal.
But this analysis misses the point. Of course economic downturns exaggerate negative economic trends. But it doesn’t mean that the underlying dynamics should be ignored. We have a financial sector with increasing mobility where virtually everything that could be done in a branch can be done from the comfort of your own home or in the middle of a busy workday. For example, Bank of America reported that slightly under 10% of its checks were deposited remotely during the last quarter.
Now, to be clear, I am not saying that the decline of the branch is a harbinger of doom for the credit union industry. For example, part of the reduction in branches reflects the consolidation of community banks as these banks are gobbled up by regional and national behemoths. This makes the argument that credit unions are the only true remaining community banks all the more salient. Furthermore, credit unions are as capable as banks are to modernize branches to reflect the modern financial marketplace. My only concern is with those credit unions that ignore what is an increasingly obvious reality. Technology, demographics, and economic trends have created the conditions for fundamentally altering the way in which banking services are provided.
Here are some quick hits to get your day started, including my bet=the=mortgage football picks.
With the tone of a once indulgent teacher who has let her students hand in late homework once too often, NCUA issued a letter to credit unions on Wednesday warning them to get their Call Reports in on time. . .or else!!!
Specifically, NCUA warned credit unions that, starting with the January 24th filing deadline for the fourth quarter 5300 Call Reports, tardy and/or sloppy credit unions face fines ranging from $2,000 to $1 million for knowingly false filings. (A little free legal advice: if you think your credit union might be slapped with the $1 million grand prize you should stop reading this blog and contact a really good lawyer). NCUA is threatening to use its power to fine credit unions out of frustration that more than one thousand credit unions were late getting their Call Reports filed last quarter.
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Speaking of NCUA, it released its agenda for the first meeting of the year and among the topics to be considered are a final rule to permit a limited number of credit unions to be given limited authority to use derivatives and consideration of risk-based capital reform.
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The Target data breach was even more sophisticated and extensive than originally thought, according to a report forwarded to financial institutions yesterday. The Wall Street Journal quotes one analyst saying “what’s really unique about this one is it’s the first time we’ve seen the attack method at this scale. It conceals all the data transfers. It makes it really hard to detect it in the first place.” For those of you interested in learning more about the breach, a great source of up-to-date information is once again the Krebs on Security website.
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A survey of business sentiment in the New York Metropolitan Area conducted by the Federal Reserve Bank of New York revealed that a positive view of the economy reached its highest level since 2007, but still remained negative “ suggesting that on balance, respondents continued to view the business climate as worse than normal.” The survey, which tracks the service sector, revealed that many businesses are seeing an increase in business that they expect to grow stronger over the next six months. At this point, the businesses are still holding back on new hires.
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Finally, here are my long awaited, bet-the-mortgage championship game football picks: these babies are so solid that credit unions should be able to make these bets and classify them as Tier I capital. First, it’s always dangerous to question the wisdom of Las Vegas, but I don’t know what they were thinking making Denver a 5.5 point favorite over New England. Take the points and the money, New England wins outright. In the battle of former Pack-10 coaches who really don’t like each other, give the 3.5 points and take Seattle. On that note, have a great weekend. See you Tuesday.
For years, NCUA and other regulators have been warning of impending interest rate risk on the mistaken assumption that a spike in economic activity with a resulting spike in short term interest rates was right around the corner. However, the Fed’s decision to reduce its long term bond buying program by $10 billion a month underscores that now we are actually entering a period where examiners will be justified in taking a particularly close look at your credit union’s approach to interest rate risk. Here’s why.
As explained in his December overview of credit union economic activity, NCUA’s chief economist John Worth points out that over the last year the percentage of credit union assets dedicated to investments and loans has remained constant at about 28%. However, the composition of those assets has changed with credit unions committing to longer term investments. For example, investments with a maturity of less than three years declined 11% last year while those with longer maturities increased over 30%..
Although this might make examiners uncomfortable, I’ve argued for a while that the approach makes sense in light of an anemic economy where a sudden burst of economic activity is not around the corner and Fed policies are specifically designed to keep interest rates artificially low.
But with the Fed’s announcement that it is beginning to taper, things will get a little tricky in the coming months. As Worth explains, as the Fed gets out of the long term bond buying business, credit unions may be tempted to actually increase their purchase of longer term securities. This impulse will be all the more tempting since the Fed remains committed to keeping short term interest rates at or near zero for the foreseeable future. The danger, as explained by Worth, is that when short term interest rates do begin to rise, they will most likely rise faster than the rise in longer term rates creating perfect conditions for a net interest margin squeeze.
Furthermore, if and when this does occur, it will be occurring in an environment where it will be difficult to find places to maintain a profit margin. For example, regulators have already constrained fee income and this is before new mortgage regulations even kick in. In addition, since many credit unions have already seen improved delinquency levels, chances are you have already reduced your loan loss reserves. Finally, the FDIC, in an analysis similar to that presented by the NCUA, pointed out to the institutions it oversees that no one knows how long consumers will keep their money stowed away in basic bank accounts once they can start investing their money in longer term instruments with safe returns.
Put all this together and what you have is a potentially potent mix that justifiably raises the eyebrows of your examiner. All of this is, of course, manageable and I know many of you have been through similar periods in the past. Just keep in mind that the risks are out there and for the first time in a while there’s some substance behind the concerns.