Posts filed under ‘Economy’

“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

Bank Preemption Takes Center Stage

There is currently a case before New York’s Court of Appeals for the Second Circuit that could have a direct impact on your credit union’s bottom line even if you don’t have the great fortune of living in New York. The issue is whether or not federally chartered banks are subject to a New York law mandating that lenders provide interest payments to borrowers with mortgage escrow accounts. If the court upholds two lower court rulings, federally chartered credit unions should be prepared to also provide interest payments. NCUA preemption standards are less stringent than those typically exercised by the OCC.  The cases being appealed are Hymes et al. v. Bank of America NA, case number 21-403, and Cantero v. Bank of America NA, case number 21-400, in the U.S. Court of Appeals for the Second Circuit.

I have blogged about these cases before, and I just wanted you to know that I am not the only one paying attention.  Law360 reported that the OCC has weighed in with an amicus brief.   The issue is the applicability of New York General Obligation law 5-601 which requires banks and credit unions to pay interest on mortgage escrow account balances. The statute has been around for decades, dating to the early 80’s when high inflation rates chipped away at member’s savings. But since the law’s inception, courts have ruled that its provisions don’t apply to federally chartered institutions.  The OCC argued that in refusing to preempt New York’s law, the lower courts adopted a legal standard which violates long standing precedent.

If you think you got it bad…

If you’ve been obsessing about your credit union’s influx of cash, you are not alone.

Yesterday, the FDIC released this report detailing the impact that the unprecedented influx of cash has had on banks. The report was required as part of a restoration plan that had to be imposed on banks after they fell below their statutory deposit baseline.

What struck me about the report is just how much financial institutions have riding on the assumption that this glut of money is a short-term phenomenon.  Obviously, if people start spending money again now that the COVID restrictions have been lifted, the savings glut will be a short-term glitch that we can reminisce about over drinks when we look back at the pandemic. But what happens if inflation continues to rise and consumers are weary to spend too much money as the economic outlook remains uncertain? Hopefully we will not have to find out.

June 16, 2021 at 10:09 am Leave a comment

Muddled Economic Outlook for CUs Continues to Challenge Industry

The economy continues to send out mixed signals when it comes to the environment in which credit unions will be operating for at least the next year. Unfortunately, the conditions seem to be ideally suited to accelerate the bifurcation of the industry between those credit unions large enough to compensate for historically low interest rates with increased lending and those primarily dependent on investment income.

That is the take of this armchair-economist-wannabe of the NCUA’s first quarter summary of the industry’s financial performance. It paints a picture of an improving economy which will nonetheless continue to squeeze the profits of many small to medium sized credit unions.  For example, credit union share deposits rose 23 percent over the last year to $1.69 trillion (incidentally, money market accounts were up 28.5 percent.) Unfortunately, the statistics underscore that loan demand has not increased nearly fast enough to make money off these deposits. The industry’s loan-to-share ratio currently stands at 68.8 percent down from 81.1 percent in the first quarter of 2020. In the aggregate, credit unions are seeking higher yields by putting some of this money into longer term investments. Investments with maturities of 5-10 years rose $54.4 billion to $86.5 billion. Investments with maturities greater than 10 years increased to $9.4 billion.

The bottom-line is many credit unions continue to be caught in a classic vice in which the economy is growing but not fast enough to nudge up interest rates. Furthermore, the consumer is saving more money than ever before and has even dramatically decreased credit card debt over the last year.

In contrast, the number of federally insured credit unions with assets of one billion dollars increased to 388. These intuitions experienced a net worth increase of almost 14 percent. They now hold 72 percent of the industry’s combined assets and experienced robust loan growth at 8.3 percent.  In contrast, net worth for the industry as a whole decreased from 11 to 10 percent. 

Not surprisingly, consolidation is continuing. The number of federally insured credit unions declined to just over 5,000.  There are now 3,167 federal credit unions and 1,901 state chartered credit unions.

June 7, 2021 at 10:10 am Leave a comment

Is the Fed Squeezing Small Lenders Out of Existence?

Good Morning, folks.

In the 1930’s the Federal Government responded to the collapse of the farming industry by putting in place a government back framework meant to stabilize the farming industry and stem the impact it was having on everyday Americans. Today, the family farm is largely a relic of a bygone era but the government subsidies designed to keep it alive are still alive and well and disproportionately benefiting larger corporations that don’t need the money.

Many of the same trends are taking hold in the banking industry to the detriment of credit unions.

I’m not going out on much of a limb here to say that you should expect your credit union to have to pay more into the Share Insurance Fund in approximately six months. That’s my takeaway from NCUA’s report on the Share Insurance Fund provided at yesterday’s monthly board meeting. It is also the assessment of one Todd Harper who put credit unions on notice that “absent some unknown external event, these forces seem likely to eventually” push the equity ratio below the 1.20 level at which point NCUA must pass around the Share Insurance Hat.

This unfortunate development isn’t all that surprising. This past week many New York credit unions have had the opportunity to listen to Steve Ricks pithy overview of current credit unions economic trends. Members are stocking away savings at unprecedented levels thanks to all of that government stimulus spending. The bad news is that loan demand isn’t keeping pace and investment returns are non-existent. Put this all together and you have the profits of many credit unions, particularly smaller ones, being squeezed even more than they have been in the past. Perhaps as the economy picks up even more, so will loan demand. We will have to wait and see.

But let’s take a look at the big picture. The trend we are seeing is nothing more than the continuation of forces put in place by the Federal Reserve more than a decade ago. When the mortgage meltdown looked as if it might trigger a depression, even Janet Yellen explained that, while she was empathetic to the difficulties faced by community banks, the economy as a whole benefitted from the stimulus resulting from historically low interest rates.

At the time this argument made sense. But by continuing to take extraordinary steps to suppress interest rates, the Fed’s intervention is feeling more like a permanent lifeline to large banks then a short-term necessity. As someone who believes in the free market this doesn’t feel like a fair competition.

May 21, 2021 at 12:48 pm Leave a comment

NY Extends and Increases Foreclosure Moratorium

The New York State Legislature just passed what it is proclaiming to be the strongest moratorium law in the country.  

Specifically, it has passed a measure (S6362-A) extending until August 31, 2021 an eviction and mortgage moratorium. The law, which was originally passed in December and signed by the Governor applies to both tenants facing eviction and individuals with ten or fewer residential mortgages, one of which is their primary residence.  This prohibition does not apply to mortgages owned by Fannie Mae or Freddie Mac, which are subject to a separate moratorium.

A second closely related measure (S5742) extends the foreclosure moratorium to commercial tenants in New York State that employ up to one hundred or fewer employees or was closed to in-person operations by executive order between May 15, 2020 and May 1, 2021 and employs up to five hundred employees.

May 5, 2021 at 9:50 am Leave a comment

NCUA Provides Capital Relief to CUs Facing Surge in Deposits

NCUA used a fast-track regulatory procedure late last week to provide regulatory relief to credit unions facing capital downgrades as members continue to save funds during the pandemic even as they received the latest round of stimulus checks. 

When a federally insured credit union’s net worth ratio slips below 7% it must put aside additional funds until it becomes well capitalized again.  The NCUA Board voted late last week to waive the additional capital requirements for “adequately capitalized” credit unions-those with net worth ratios below 7% but greater than six percent (6%) §702.102 

If this regulation sounds familiar it is because NCUA promulgated similar regulations last spring but let them expire at the end of last year.  Credit unions not only got the message out to NCUA that they wanted this relief, but NCUA is concerned enough about the capital position of credit unions that it took the highly unusual step of enacting this regulation by “notation”.  This allows the NCUA Board to act on time sensitive regulatory matters § 791.4  

April 19, 2021 at 9:20 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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