Posts filed under ‘Economy’

Is Finding Employees The #1 Problem Facing Your Credit Union?

As I chatted with many of you during the Convention this past week, a common refrain emerged: credit unions, are finding it difficult to attract and retain workers.  The problem exists for large credit unions seeking to attract individuals qualified to fill key executive positions, to smaller credit unions simply trying to make sure they have enough tellers when people come in the branch. 

I know this is cold comfort, but the problem is of course not unique to credit unions.  The WSJ reported yesterday that:

  • Head counts at companies with fewer than 50 employees declined in three of the past four months
  • Furthermore, 63% of small-business owners say that hiring challenges are affecting their ability to operate at full capacity

The good news is you are not alone; the bad news is we are starting to see the classic signs of stagflation, a period of high unemployment and high inflation as businesses are not able to keep up with demand, resulting in decreased economic activity.  The WSJ is also reporting that  “large companies that saw significant growth during the Covid-19 pandemic are beginning to take a more cautious approach to hiring”.

On that happy note, it was great to see you all at Convention.  Let’s hope we never have to do another zoom get-together.

June 22, 2022 at 9:41 am Leave a comment

How Are You Coping With Your Stimulus Hangover?

Last week’s historically bad news about the rate of inflation further confirms what we have already been suspecting: let’s face it, Larry Summer’s was right all along.  The second round of stimulus spending was the economic equivalent of one too many drinks at the bar and now we have to deal with all those unexpected consequences. 

What this all means of course is that the number one question facing your credit union, regardless of its size, is, as posed by the American Banker this morning: When will depositors start shopping for higher rates? A second question is, when should you start caring?

In case you missed the news, the Bureau of Labor Statistics informed us on Friday that inflation was humming along at a 40 year high of 8.6%. As important as the actual number, however, is the likelihood that this is not some temporary blip caused by rusty supply chains and post COVID animal spirits, but is rather proof that inflation has seeped into the economy and can only be eradicated with increasingly higher and swiftly imposed interest rates.

All this is taking place as credit unions deal with an excess of funds – triggered by those inflationary stimulus payments – and lagging loan-to-share ratios. 

The numbers are eye popping.  In Q4 of 2020, credit unions experienced a 40.2% increase in share drafts growth.  In Q1 of 2022 that number was down to a still historically robust 18.6%.  Little wonder that many credit unions have experienced declining net-worth ratios.

So, at what point will your members expect a greater return on their deposits?  It appears to this armchair wannabe economist that your members are already reacting to interest rate changes.  For instance, the same quarter that saw a 40% increase in share draft growth saw a 4% decrease in share certificates, a trend which has held steady now for a year and a half.  Your members are highly liquid and only have to go food shopping to realize that a dollar doesn’t buy them what it used to. In fact, the same report indicated that real earnings were down for nonsupervisory employees by 0.5% as a result of the inflationary surge. 

The last time we saw this trend play-out in the late 70’s, many credit unions actually saw a dramatic decline in share growth.  It is only a matter of time before we start seeing it again.  Now, I get it.  A period of rightsizing would actually be good for many credit unions.  Still, at what point are you going to want to keep the cash?  It’s an interesting question and those who guess right will be in a much better position two years from now than those who don’t.   

June 14, 2022 at 9:56 am Leave a comment

Bitcoin is Dead.  Long Live the Bitcoin!

With an impeccable sense of timing, last Tuesday I gave a presentation on the future of virtual currency at a chapter event in which I proclaimed that the technology is going to fundamentally change the way banking is carried out only to read headlines the next morning detailing how investors are running for the exit when it comes to virtual currency. 

A colleague of mine who was at the event even emailed me to ask me if I wanted to change my opinion: my answer is a resounding No.  To be clear, many virtual currencies will go the way of the tulip in 17th century Holland, but the technology makes so much sense that in the coming years, financial institutions will either have to adopt it as their own or be left behind. 

When we talk about virtual currency, it’s important that we all agree on the terms to be used, particularly in the absence of regulatory definitions.  When I’m referring to virtual currency, I am talking about an electronic store of value which is traded electronically using Distributed Ledger Technology (DLT).  By DLT, I am referring to a system of network computers which validates transactions involving virtual currencies using advanced cryptography without the use of a third-party intermediary.

I have no idea what the bitcoin is going to be worth a week from now; but I do know that, as we speak, companies large and small are thinking of ways to apply DLT.  For example, imagine a world in which the job of the county clerk to record home purchases and liens is usurped by DLT which creates a chain, which everyone can access, recording every single transaction involving that piece of property. Imagine a world in which overdraft transactions are a vestige of a bygone era because transactions are executed immediately. 

This is also a world in which there is less and less need for third party intermediaries such as credit unions.  Remember, a DLT network validates and records transactions. 

But this is not one of those “credit unions are obsolete” blogs.  Instead, for those of you who understand the technology, there are many things you can do to integrate your institution into this new technology and benefit your members along the way.  For example, the OCC has already authorized banks to act as electronic wallets– effectively, safety deposit boxes – for consumers who want a central place to store those passwords and electronic keys they need to access all those transactions recorded on those distributed ledger chains.  In addition, this technology will make the NACHA network about as antiquated as rabbit ears on a black and white television. 

The bottom line is: even as you chuckle at that crazy cousin who just lost all that money investing in a virtual currency which exists only in cyberspace, keep on planning for a world in which the technology that powers that, currency changes the way virtually all important financial mediation is done. 

May 17, 2022 at 9:32 am 1 comment

Is Your CU Ready to Take On Inflation?

It’s been a long time since we’ve seen inflation rising this fast.  So long in fact, that virtually an entire generation of credit union leadership has come and gone without ever having to deal with the impact that inflation can have on their institutions.  Here are some lessons from history that I gleamed from NCUA’s 1981 credit union report

I’m assuming for the purposes of this blog that the inflation that we are experiencing today can no longer be considered a transitory blip caused by temporary factors like supply chain stress.  While I will leave it up to the economists to explain the technical reasons for inflation, with China insisting on locking down its economy to fight COVID; the end of the war in Ukraine nowhere in sight and a red-hot labor market, the ingredients for inflation will be in place for months to come.  So, what can history teach us? 

  • Don’t be slow to react to interest rate sensitivity.  In the late 70s, money market funds became widely used as they offered consumers a way around Regulation Q, a depression era regulation which capped interest rates on checking accounts.  According to the report, large credit unions were slow to react to this increased competition with the result that in the late 70s, credit unions experienced “severe” outflows of member savings and a liquidity crunch. 

Today, members have even more opportunities to seek out higher returns.  The money market industry is now fully mature and a much higher percentage of Americans invest in the stock market than they did in the early 80s.  In fact, there are even predictions that the FDIC might see a drop in funds for the first time since WWII.  Presumably the same trends will impact credit unions.

  • Get ready to offer more share certificates. Federal credit unions paid more than $300M in dividends to their shareholders in 1981 which was a 25% increase in the amount paid in 1980.  The increase was fueled by share certificates on which credit unions paid $1.3B in interest dividends in 1981 compared to $711M in interest dividends paid in 1980.
  • Are your members going to be more or less loyal to their credit union than they were in 1981?  In 1981, 88% of all members were in occupational credit unions and another 6.6% were in associational common bond institutions.  Today, community and multiple common bond credit unions are the engines of the industry.  Will members be more likely to leave these institutions than their parents were to stop using their employer CU, particularly given the increasing use of technology?  If the answer is yes, then will we see profit margins shrink for these institutions? 
  •  Expect even more mergers. The early 80s also witnessed increased merger activity which posed new challenges for the Share Insurance Fund which was then only 11 years old.  The fund suffered losses that resulted primarily from a “major increase of costs due to merger and liquidation expenses” which increased 33% between 1979 and 1981.

Only time will tell, but if history is any guide, there is a bumpy road ahead for the industry.

April 13, 2022 at 11:51 am 1 comment

The One Thing All Credit Unions Have In Common

The one thing all credit unions have in common regardless of their size or where they are located is that they are struggling to hire and keep employees.  At least that seems to be the case anytime I’ve talked to a credit union or anyone in any business who is trying to find employees over the last several months.  The March unemployment statistics released on April 1st indicate that this trend is likely to continue for the foreseeable future and that inflation is likely to continue to impact your operations more than at any time since the early days of the Regan administration. 

The good news is that we are beginning to see the light at the end of the tunnel when it comes to covid’s impact on the economy.  According to the Department of Labor, while there are still 1.6 million fewer people employed than in February 2020, the employment rate for males is back to its pre-pandemic level, and there are some industries that are actually exceeding the 2020 employment.  Overall, the economy picked up 562,000 new jobs in the first quarter. 

But all this growth continues to come with pernicious consequences for employers.  Most importantly, “average hourly earnings of all employees on private nonfarm payrolls increased by 13 cents to $31.73 in March. Over the past 12 months, average hourly earnings have increased by 5.6 percent”.  In addition, the Wall Street Journal noted that the job market remains incredibly tight.  There are more job openings than unemployed people.  As a result, workers are quitting at record rates “leaving some companies short-staffed, at least temporarily”.  Sound familiar?

And of course inflation is continuing to impact your credit union, both operationally and as an employer.  While the 5.6% increase in wages is dramatic, it’s nowhere near the 8% inflation rate.  Which brings us back to the days of Paul Volcker who, as Chairman of the Federal Reserve in the late 70s and 80s, tamed inflation but only after high interest rates triggered a recession.  The latest numbers demonstrate that the Fed has no choice but to continue to raise interest rates.  Whether history is destined to repeat itself remains to be seen. 

April 4, 2022 at 9:51 am Leave a comment

“First” In Credit Union History

Happy Friday from Buffalo, where yours truly should be especially pleased that he is experiencing unseasonably warm, snow-free weather as opposed to one of those freakish lake-effect snowstorms in which Buffalonians take such pride. But there is a lot to be ambivalent about as we take a look at the trends that are impacting credit unions today.

Right now, the economy is spinning in more directions than a five-year-old on a sugar high. As a result, now more than ever, we need economists with more than two hands to capture the impact that all this might have on the credit union industry. So you should all take the time to read the latest economic trends analysis from CUNA Mutual which is filled with plenty of ammunition for the optimist and pessimist alike. For instance, CUNA Mutual is reporting that for the first time in credit union history, share drafts make up a larger percentage of credit union total deposits than share certificates. On the one hand, the armchair economist in me says that this is good news since it decreases the cost of managing accounts, and with the direction of the economy still uncertain, we really don’t have to worry about people rushing to pull all that money out of their credit unions. In fact, the credit union cost of funds is expected to fall 30 basis points in 2021 to 0.4% from 0.7% in 2020. On the other hand, interest rate uncertainty will continue to plague long term planning for years to come, and do we really want an industry dedicated to thrift to be more dependent than ever on members who are not making long term commitments to the industry? 

BSA Examination Manual Updates

Those of you in charge of your credit union’s BSA program will certainly want to take a look at the latest updates to the FFIEC BSA examination manual.

The update that most intrigued me was a new general introduction dealing with customer due diligence which stipulates that:

Examiners are reminded that no specific customer type automatically presents a higher risk of ML/TF or other illicit financial activity. Further, banks that operate in compliance with applicable Bank Secrecy Act/anti-money laundering (BSA/AML) regulatory requirements and reasonably manage and mitigate risks related to the unique characteristics of customer relationships are neither prohibited nor discouraged from providing banking services to any specific class or type of customer.”

It sounds as if some examiners have been a little too aggressive in discouraging financial institutions from opening up certain types of accounts. This is welcome language in the event the federal government ever gets around to legalizing marijuana banking.

Speaking of the Federal Government…

Last night the Congress passed legislation funding Government operations until February. It’s pathetic that we have gotten to the point that this is big news, but so it goes.

On that note, enjoy your weekend. Sorry, Bills fans, but the Patriots are back, don’t expect to win on Monday night.

December 3, 2021 at 9:34 am 5 comments

Climate Change is Bad: Now What?

As yours truly read through the Financial Stability Oversight Council’s (FSOC) climate risk report yesterday, I was bracing for a series of absurd mandates in which credit unions would have to join larger more sophisticated institutions in complying with a host of new requirements, and yet another loss by the New York Giants. I was pleasantly surprised on both counts. The report is an exercise in bureaucratic reasonableness, which gives NCUA plenty of flexibility to respond appropriately and not hysterically to the threats posed by climate change to the credit union industry.

The FSOC is comprised of 10 voting members, including the NCUA, and five non-voting members representing interested stakeholders such as state regulators. Its goal is to identify emerging risks within the financial system. At the time of its creation, there was a debate as to whether or not credit unions should even be included in a group which represented investment banks, the largest depository institutions in the world and the Securities and Exchange Commission.

When I heard that it was going to come out with a climate change risk report mandated by an executive order, I expected to see the outline of new regulations which would impose new reporting requirements on credit unions of all shapes and sizes. The report got the headline it was looking for when it proclaimed that climate change is an emerging and increasing threat to financial stability. But, the resulting action items included the following language:

“As part of their supervisory activities, the depository institution regulators expect to review within traditional prudential risk categories, as relevant, how effectively institutions incorporate climate-related financial risks into their risk management systems and frameworks, appropriate to their size, complexity, risk profile, and location.”

The biggest action item in the report is for bank regulators to augment their existing staff and develop greater expertise when it comes to assessing climate change risk. 

For its part, NCUA explained how it has established a series of working groups to address climate change. Its “ultimate goal” is to ensure that the system remains resilient in the face of climate related risk.

You can recognize climate change for the threat it is while also questioning the value of imposing additional mandates on depository institutions which do not engage in the type of activity that can mitigate climate change’s worst effects on a systemic level. If the FSOC’s report represents the approach ultimately taken by the NCUA and other depository regulators, we can all breathe a sigh of relief.

October 25, 2021 at 8:54 am Leave a comment

The Known Unknowns About The Transaction Reporting Proposal

The more I think about the IRS’s tax proposal, the more I want to channel my inner Donald Rumsfeld. The late secretary of defense famously explained that “There are known knowns. There are things we know we know. We also know there are known unknowns. That is to say, we know there are some things we do not know. But there are also unknown unknowns, the ones we don’t know we don’t know.”

In the last couple of days I have started to get calls not only from the usual policy crowd that recognizes the Account Transaction Reporting requirement for the lousy idea it is, but also from the compliance crew that would be responsible for translating the idea into a tangible framework. 

Here is some information about what we know and don’t know about this extremely fluid idea:

Where can I find this legislation?

  • No legislation has actually been introduced. What we are debating is a proposal originally outlined by the Treasury as part of the Administration’s Revenue Proposals (starting on page 88).

When would this proposal take effect?

  • If the Treasury has its way this proposal would take effect for the 2023 tax year.

What exactly is the Treasury proposing?

  • In its own words, the Treasury is proposing a “comprehensive financial account reporting regime” (that doesn’t sound too scary does it?) Financial institutions would play a crucial role in this process. They would be responsible for reporting gross inflows and outflows out of accounts.

What information would financial institutions be required to report to the IRS?

  • In a caustically worded fact sheet released two days ago, the Treasury stressed that financial institutions would not report individual transactions to the IRS. Instead, they would only have to provide a mere “two additional data points”.  These data points would be:
  1. The total amount of funds deposited; and
  2. The total amount of funds withdrawn over a year.

(Gee I can’t imagine why your members would be upset upon learning you have to turn this information over to the IRS.)

How exactly would an account transaction be defined by the Treasury?

  • This one’s going to be tougher to clarify than the Treasury may realize. For example, if I internally transfer money from my savings to a checking account, is that an account transaction? This is a particularly important question for credit unions which still utilize the concept of “master” and “sub” accounts (by the way, this terminology drives me nuts but that can be the subject of another blog).

Are there thresholds below which this report would not be issued?

  • As originally proposed by the Treasury, the plan would not have applied to accounts with $600 or less in transactions. In recent weeks there have been proposals to raise that threshold to $10,000.  But remember this is an aggregate threshold.  Over the course of a year, almost all your members would make transactions that in the aggregate exceed this threshold.  Furthermore, with or without a transaction threshold by Congress, your credit union would be responsible for ensuring that this information is appropriately tracked. At the very least this translates into more time and expense working with your core operating system provider. For smaller credit unions, this mandate will be an extremely labor intensive mandate with which to comply.

Isn’t Congress going to ensure that this only applies to certain members?

  • This is where we really need to see actual language. According to the Treasury’s press release, Congress has modified the proposal to include an exemption for wage and salary earners and federal program beneficiaries. Under this approach “such earners can be completely carved out of the reporting structure.”

This is the type of language which drives compliance people crazy. Among the questions that come to mind are: How exactly are financial institutions supposed to differentiate transactions involving employer wages from other types of legitimate transactions not involving an employer?  For instance, many members derive income from driving Uber or having small businesses.

October 21, 2021 at 11:02 am 1 comment

Hochul Prepares To Make Her Mark

Yesterday, Lieutenant Governor Kathy Hochul took to the air waves when she held her first press conference. While it’s always dangerous to make predictions, what’s clear is that Hochul’s will not be a caretaker Administration content to keep the seat warm until the next gubernatorial election in 2022.

She used the nationally televised platform to indicate that when she formally takes power, in a little less than two weeks, the native of Western New York will hit the ground running. Expect to see a state-of-the-state style speech shortly after her ascension and some new faces in and around the Executive Chamber.

Even as we anticipate changes, however, the mechanics of government remain unchanged. For credit unions this means that at some point the executive will act on two key credit union priorities passed by the Legislature this year. What I am of course referring to is S191 Sanders / A5459 Darling which allows credit unions to participate in the Excelsior Linked Deposit program and S 1780-C Skoufis / A399-B Rozic, which authorizes the use of Remote Notarization.

To gain further insight on how these changes could impact credit unions, on Friday we will be hosting a discussion with David Weinraub, a seasoned veteran of the Albany political scene and our outside lobbyist.  (register here to join)

Calls Mount To End Asset Purchases

In the wake of an inflation report indicating that the economy is not in danger of overheating, pressure is mounting on the Fed to end its bond buying program which has kept interest rates artificially low since the pandemic put the economy on life support.

In a televised interview yesterday, Robert Kaplan, President of the Federal Reserve Bank of Dallas, called for an aggressive end to the program. If he has his way, at its September meeting the Fed will announce that the program is ending. He wants to see the program wound down over an eight month period. It’s going to be interesting to see how the captains of industry react to this and other similar announcements in the coming days. Again, it’s dangerous to make predictions but don’t be surprised if you see a market correction in the coming weeks. This will actually be a sign that the economy is getting back to normal.

August 12, 2021 at 9:20 am Leave a comment

The New York State Banking Market Becomes Even More Competitive

The metropolitan area is about to get another aggressive financial institution.

Crain’s New York Business is reporting that Rhode Island based Citizens Financial Group agreed on Wednesday to buy Investors Bank of New Jersey for $3.5 Billion. The move comes just two months after the bank purchased HSBC’s New York branches. A couple of quick thoughts about this news:

First, the announcement reflects one of the most important debates we will see play out in the coming years between those who believe that the NYC is bound to bounce back to its former glory if and when the pandemic fades away and those who believe that the pandemic has accelerated a fundamental shift in when and where work gets done. Put me in the latter group. Why in God’s name are companies going to be willing to spend money on renewing leases when their employees have demonstrated that they are happier and just as productive working from home?

Secondly, I’ve said it before and I’ll say it again: community banks love to criticize credit unions but the interstate banking laws passed during the Clinton administration triggered a business model under which banks such as citizens have to grow at a frenzied pace in order to remain competitive. Along the way they snap up smaller competitors resulting in fewer consumer options and making it even more difficult for credit unions and traditional community banks to remain viable.

The Fed Begins The Taper Dance

The Fed released this statement at the end of the two day meeting of its open market committee. Individuals who specialize in scrutinizing these statements with about as much intensity as biblical scholars scrutinize the dead sea scrolls see signs that the Fed is laying the groundwork to reduce its bond buying program by the end of this year.

Remember the last time the Fed went through a similar process then Chairman Bernanke’s statements triggered a short but dramatic rise in interest rates which by some estimates added as much as $200 a month to 30 year mortgage payments. This time the Chairman is breaking the news as subtly as possible.

As summarized by the Wall Street Journal, “Some officials are concerned that a burst of inflation this year from bottlenecks associated with reopening the economy will prove more durable than previously anticipated. These policy makers are eager to start the taper, in part because they and their colleagues have said they aren’t likely to consider raising interest rates until they are done tapering the asset purchases… Another camp thinks recent price pressures will subside and could leave the Fed in the same position it faced for much of the past decade, during which global forces kept inflation below 2% even with historically low interest rates. They are worried that accelerating plans to wind down the asset purchases could raise questions among investors about the Fed’s commitment to achieving its economic goals.”

On that note, enjoy your day. Remember that the Yankees have an afternoon start today if you want to listen to the game over your lunch hour.

July 29, 2021 at 8:54 am Leave a comment

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Authored By:

Henry Meier, Esq., Senior Vice President, General Counsel, New York Credit Union Association.

The views Henry expresses are Henry’s alone and do not necessarily reflect the views of the Association. In addition, although Henry strives to give his readers useful and accurate information on a broad range of subjects, many of which involve legal disputes, his views are not a substitute for legal advise from retained counsel.

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