Posts filed under ‘Political’
Maybe it’s because the desolate Albany landscape with its frozen mounds of exhaust-tinged snow and sub-zero temperatures makes me feel like I’m inhabiting a post-apocalyptic world, but a couple of days ago I got around to reading the FFEIC’s new appendix to its examination handbook dedicated to disaster preparedness entitled Strengthening the Resilience of Outsourced Technology Services. In all seriousness, it is a must-read for any credit union that has to have a business continuity plan (BCP) and contracts with third parties for services that should be integrated into this business plan. I bet that is almost every credit union.
Regulators have long emphasized the need for appropriate due diligence when entering into third-party relationships. In addition, Business Continuity Planning has been a major point of regulator emphasis since 9-11; not to mention that “once in a century storms” seem to be coming every other year. This new appendix zeros in on the importance to financial institutions of insuring that appropriate vendor services are integrated into BCP plans and testing. As the regulators commented in releasing the appendix, “a financial institution should ensure that its third-party service providers do not negatively affect its ability to appropriately recover IT systems and return critical functions to normal operations in a timely manner.“
The appendix highlights four key points of emphasis for examiners assessing third-party relationships.
(1) Third-party management addresses a financial institution management’s responsibility to control the business continuity risks associated with its third-party service providers (TSPs) and their subcontractors.
(2) Third-party capacity addresses the potential impact of a significant disruption on a third-party servicer’s ability to restore services to multiple clients.
(3) Testing with third-party TSPs addresses the importance of validating business continuity plans with TSPs and considerations for a robust third-party testing program.
(4) Cyber resilience covers aspects of BCP unique to disruptions caused by cyber events.
I don’t want anyone to break into a cold sweat thinking that a new compliance requirement is necessarily being imposed on them. If you don’t outsource core operational functions to third parties this appendix shouldn’t concern you much. But if your credit union can’t operate effectively unless a vendor is also on the job, then you have an obligation to work with that vendor and make sure that it has a Business Continuity Plan that is compatible with your own.
Think about it: if your vendor backs up all your account information at a facility down the block from your credit union, your BCP plan has some serious holes.
Don’t Fire Until You See the Whites of Their Eyes
Yesterday, the CU Times reported that Sen. Richard Shelby (R-Ala.), chairman of the Senate Banking, House and Urban Affairs Committee, would not rule out doing away with the credit union tax exemption as part of an overhaul of the tax code.
Shelby’s equivocation on the tax exemption underscores that tax reform poses dangers for credit unions, but his stance should hardly surprise anyone, nor should it send us scrambling to the ramparts as if the industry is in imminent danger. The fact is that in any push to overhaul the tax code a prominent veteran lawmaker like Shelby isn’t going to take anything off the table. There is a lot of negotiating to be done, if and when we ever get to a tax reform end game.
Should the industry be vigilant? Absolutely. But, in my ever so humble opinion (and I stress only my opinion), in recent years the industry has overreacted to the threat of tax reform with the result that it has not pushed aggressively enough for other parts of its agenda. There may come a time when we need to activate the grassroots in a major push to save the exemption, but that time is not here yet. In the meantime, let’s not let the bankers sideline our agenda every time they advocate for ending the exemption or draw too many conclusions every time a legislator gives less than 100 percent support for the industry.
Yesterday, the Government announced a settlement with S & P and its parent company McGraw-Hill in which the ratings agency effectively conceded that it violated its own policy by letting business considerations influence the ratings it gave to issues of mortgage-backed securities and collateralized debt obligations. The $1.375 billion settlement is ostensibly “historic” since it represents the first such admission of wrong doing by a ratings agency in a case brought jointly by the Department of Justice and 19 states’ attorneys general. New York did not participate in the litigation.
Like so much else in relation to the Government’s response to the mortgage meltdown, there’s less here than meets the eye. S & P’s major concession was that it will do what it already is publicly committed to, which is objectively rate the issues it assesses so that investors like credit unions can invest with confidence. However, does anyone really think that credit rating agencies, which are still dependent on doing business with debt issuers to stay in business, won’t continue to feel pressured to let business relationships influence their ratings? Remember that one of the most important, and in my mind silliest, Dodd-Frank reforms is to mandate that financial institutions, including credit unions, not rely exclusively on credit agency judgments when making investment decisions. But at the end of the day, credit rating agencies will continue to be relied on. After all, your average investor simply doesn’t have the expertise that good credit rating agencies do to make judgments about the quality of debt they are buying.
Bottom line, this is yet another example of how credit unions were more impacted operationally as a result of the mortgage meltdown than were many of the institutions responsible for causing the mess. Oh well.
Meet the New Boss
Bronx Assemblyman Carl Heastie was elected to replace Sheldon Silver as Speaker of the New York State Assembly. As such, he becomes one of the three most important people in State Government. The Speaker has been a supporter of credit unions in the past, and the Association looks forward to working with him going forward.
Yesterday was kind of an interesting day in Albany. In case you missed it, and if you live in the New York area the only way that happened is if you were hiding out in a cave, Assembly Speaker Sheldon Silver, one of the longest serving speakers in the history of the Assembly, has been indicted on federal corruption charges. At this point, all we know for sure is that allegations have been made against the Speaker, the Democratic Conference remains publicly committed to him, and that the Speaker can legally remain in his post unless he is convicted.
Once the initial shock dies down and the dust begins to settle, we may very well see the Legislative Session proceed normally. In 1991, then Assembly Speaker Mel Miller was indicted on federal fraud charges involving real estate transactions on behalf of a client he represented in his private law practice. Miller continued to serve as the Speaker, including working with then-Governor Mario Cuomo in an attempt to convince the State Senate Republicans to go along with a 15-month budget. When Miller was convicted, a conviction that was overturned on appeal, he automatically lost his seat, Saul Weprin was chosen as Speaker and when he passed away, Sheldon Silver ascended to the Speakership in 1994.
The game of musical committee chairmanships that marks the start of every legislative session in Albany has begun. Senator Diane Savino, who was a member of the five-member Independent Democratic Conference, has been named Chairman of the Senate Banks Committee. She replaces Senator Joseph Griffo who is moving to Chair the Senate Energy Committee. Griffo was a key supporter of credit union legislation including sponsoring our field of membership bill (Chapter 502 of the Laws of 2014). Savino has also been supportive of credit union initiatives. We look forward to working with her in her new role.
Speaking of the credit union field of membership bill, as expected, earlier this week Senator Griffo and Assemblywoman Robinson introduced a chapter amendment to this legislation (S.1808/A.1348). The amendment, which was agreed to as part of negotiations with the Governor to secure the bill’s approval, provides that, when it considers a credit union’s application to enhance its FOM, the Department of Financial Services will “consider the credit union’s record and history of serving underserved areas, as well as low and moderate-income individuals within the communities it currently services, if any, and its commitments to serve underserved areas, as well as low and moderate-income individuals in the communities to be served.” The amendments also clarify that the DFS has the authority to impose geographical and other limitations it considers appropriate.
Ding Dong, the witch is dead.
With the Supreme Court’s decision not to hear an appeal by merchants complaining that the Federal Reserve’s interchange fee cap is too high – and I thought we lived in a free market system – the latest round of merchant interchange litigation has come to an end. Remember that the litigation never directly impacted your credit union unless you work for one of the relative handful with $10 billion or more in assets. Still, the victory is an important one because of concerns that the interchange cap puts downward pressure on what all issuers ultimately receive.
The litigation came down to how much deference the Federal Reserve should be given by the courts in implementing Durbin’s mandate that it devise an interchange fee cap. The amendment tasked the Federal Reserve with making sure that interchange fees were “reasonable and proportional to the cost incurred by the issuer with respect to the transaction.” It further specified that “in making this determination distinguish between … the incremental cost incurred by an issuer for the role of the issuer in the authorization, clearance, or settlement of a particular debit transaction, which cost shall be considered …, [and] other costs incurred by an issuer which are not specific to a particular electronic debit transaction, which costs shall not be considered.” NACS v. Bd. of Governors of Fed. Reserve Sys., 746 F.3d 474, 480 (D.C. Cir. 2014) cert. denied sub nom. NACS V. BD. OF GOVERNORS (U.S. Jan. 20, 2015).
The merchants argued that the twenty one cent transaction cap was too high because the Board took costs into account that the statute didn’t allow. The Government argued, and the federal DC appellate court agreed, that the statute was less than clear. The Board properly utilized discretion in filling in the congressional blanks. Yesterday’s denial to take up this decision by the Supremes puts an end to this round of litigation. But let’s face it, when it comes to litigation, merchants are like those Taken movies starring Liam Neeson, who, I vaguely recall, used to be a good actor. Even though it seems like the bad guys have taken or killed all his family members, as long as someone is making money off these sequels we haven’t seen the last of them. . .
Luck Would Have It
While we are on the subject of regulations and litigation, it’s kind of fitting that on the same day the interchange fee litigation ended, the NCUA released a legal opinion explaining why it has the authority to categorize credit unions as either “adequately” or “well capitalized” under whatever risk-based capital framework it imposes on complex (i.e. larger) credit unions. http://www.ncua.gov/News/Pages/NW20150120Opinion.aspx
The merchants argued that the Federal Reserve Board lacked authority to devise the cap the way it did because the Durbin Amendment was clear enough to be implemented without exercising discretion. Credit unions have suggested to NCUA that it lacks the authority to impose “well capitalized requirements” on complex credit unions – a group that NCUA is now proposing include any credit union with over $100 million in assets – because Congress clearly prohibited NCUA from doing so. NCUA was spooked enough by the argument to go out and get a legal opinion on the subject from the Paul Hastings laws firm. The firm concluded that Section 216 of the Federal Credit Union Act was vague and as a result NCUA had the flexibility to establish requirements for complex credit unions to be considered “well capitalized” under a risk based capital framework, so long as the agency provided “a sufficient explanation” for imposing “a higher and more conservative” capital requirement on complex credit unions.
As Washington Turns
We wouldn’t have to be delving so much into the arcane world of regulatory interpretation if Congress actually passed laws with clear directives. Like estranged lovers, as Congress and the President have drifted apart both have turned to others to meet their needs. The President has turned to Executive Orders for validation of his powers; Congressional Republicans have turned their affections to courts. Anyone hoping for a change to this dynamic was woefully disappointed by the President’s State of the Union address last night. Don’t get me wrong. If you turn on Rachel Maddow every night you loved the speech because it hit all the right liberal notes of what the world would be like if only there were no Republicans. Conversely, if you don’t miss a day of Rush Limbaugh the speech undoubtedly confirmed your worst fears of an impending socialist takeover. But, if you thought that the idea of a State of the Union address was to propose ideas that could actually become law, you were out of luck.
If you want to see just how out-of-whack Washington is, be sure to tune into today’s State of the State address by Governor Cuomo. He will actually propose ideas that can be accomplished in the coming months and occasionally even compliment Republicans without fear of being brought up on impeachment charges.
That’s the headline of a lengthy and important article in Politico which reports on the extent to which the Government is, for better or worse, the nation’s primary banker. The numbers are staggering.
The Government currently has $3 trillion in loans, comprised mainly of mortgage loans guaranteed by the GSEs and loans to more than 40 million college students. The problem is, “its lending programs sprawl across 30 agencies at a dozen cabinet departments with no one responsible for managing its overall portfolio, evaluating its performance or worrying about its risks.” The article points out that there are only four mid-level government bureaucrats given responsibility for assessing the efficacy of these loans as a whole. Think about that. Your average credit union has more people dedicated to assessing the effectiveness of its lending than does the federal government.
To anyone involved in mortgage lending, the idea that the government gets involved in extending credit is not surprising. I’ve pointed out before that although this country rightly prides itself as being an example of capitalist success, its housing and agricultural industries have been partially socialized since the Great Depression. What is surprising though, is just how much the use of credit has skyrocketed in recent years. In 2007, the federal government extended nearly $1.5 trillion; today, that number has more than doubled and stands at $3.2 trillion.
The article underscores yet again how Congress should decide once and for all how great a role the U.S. Government should play in housing policy in this country and what form that intervention should take. A lot of government credit programs make sense, particularly as a form of stimulus when larger institutions are unwilling or unable to open up the spigot on lending. But banks and credit unions do a much better job of assessing risks than does your typical government bureaucrat. Let’s decide to scrap Fannie or Freddie, devise a secondary market mechanism for small lending institutions, and scale back the extent to which the American taxpayer is the de facto guarantor for the world’s largest creditor.
Are encryption regulations on the way?
God bless the bureaucratic mind. I was going to give NCUA a pass after one of its examiners lost a flash drive containing personal information about members of the $13 million Palm Springs FCU. Accidents happen. The breach was dealt with and unless I missed something we don’t have an epidemic of examiners misplacing personal information. After all, your typical examiner is more anal than a germaphobe on a bathroom break.
But this article in the CU Times demonstrates why regulators need to be challenged. In an interview, Chairman Matz said that the agency is considering regulations mandating that credit unions provide examiners with encrypted data. Let me get this straight: a single agency employee makes a mistake and all credit unions are made to comply with a new regulation? Would encrypting data be burdensome? I have no idea. What I do know is that a steady stream of regulations combined with an almost convulsive instinct on the part of all regulators to react to every problem with a regulation demonstrates why there is an increasingly long list of mandates, many dealing with arcane subjects. In the interview, Chairman Matz said “Believe it or not, we really don’t like putting out more regs than we need.” Okay, then why doesn’t NCUA simply send out a letter to Field Examiners stressing the importance of properly handling credit union data. NCUA won’t make a decision on whether or not to propose an encryption reg until after it receives the results of its Inspector General’s investigation.
Gibson calls it quits
Upstate Republican Congressman Chris Gibson, who represents New York’s 19th Congressional District, announced that his current term will be his last. But in making the announcement the Congressman left the door wide open to remaining involved with New York politics. This is pure speculation on my part, but as a politician whose district includes part of the Hudson Valley and who has established a moderate record, Gibson would be an ideal candidate for Governor on the Republican ticket in four years.
On that note, have a pleasant day.
Today is the wake for Governor Mario Cuomo. If you are a certain age, you can’t help but be a little nostalgic and wonder what’s gone wrong with national politics. Mario Cuomo and Ronald Reagan were the two most formative political personalities of the eighties. In many respects, the views they both articulated so well in their vastly different but incredibly effective speaking styles are still being debated today.
Political commentators correctly point out that Cuomo’s 1984 Keynote Convention Speech in which he chided the Republican Party for its alleged indifference to the poor and minorities was a speech that propelled him to the forefront of the Democratic Party. He did not completely relinquish this stage until he decided not to jump on a chartered jet waiting in Albany and enter the New Hampshire Presidential primary in 1992. What this analysis overlooks though is that a year after the Governor easily won a second term, Ronald Reagan easily won the state in his bid for re-election. It was the second time the conservative icon had won the state and he is the last Republican presidential candidate to do so. Whereas Governor Cuomo saw the nation as a tale of two cities, Ronald Reagan saw a nation where the individual was transcendent and his aggregate dynamism propelled the nation as a whole. The two politicians couldn’t hold more divergent views, yet were both embraced by the political system.
Viewed through the prism of today’s ultra-partisan and crass political environment, this shows how much politics has changed for the worse. New York, and indeed the nation as a whole, was willing to embrace both Governor Cuomo and Ronald Reagan even though they proudly articulated distinctly different governing ideologies. Today, governors become politically suspect for so much as shaking the hand of the President from the opposing party (just ask ex-Florida Governor Charlie Christ and current New Jersey Governor Chris Christie). Former Speaker of the House Tip O’Neill worked with President Reagan on a series of tax reforms in the early to mid-1980s. In contrast, Former House Majority Leader, Republican Eric Cantor is out of a job today in large part because he had the audacity to suggest that Republicans should consider passing immigration reform legislation.
What’s gone wrong? Somewhere along the way, politics has become a civic religion in which neither party has room for anyone who is not a true believer in all that their party represents. Whereas Governor Cuomo and President Reagan were allowed to articulate competing visions, but then participate in a political process in which the opposition was respected and dealt with; such actions today are the surest way for a politician to be marginalized by his own party, castigated on talk radio and primaried. The best re-election strategy is to stand for nothing and oppose everything.
If you think that everything that government does is intrinsically bad, then this current ideological holy war works just fine. But if you work for a credit union and are directly influenced by government policies and regulations, then the danger of this approach is self-evident. There is a lot that needs to be done that simply isn’t getting done. Politics works a heck of a lot better than people think. Our elected representatives are ultimately a direct reflection of the electorate. Take a look at the competing 1984 Convention speeches from Governor Cuomo and President Reagan. You will vehemently disagree with one of them, but you can take pride and long for a day where such competing views are nourished and assimilated into a political process that was actually designed to get things done occasionally.
NCUA Issues Supervisory Letter
This is my first post since my phenomenal holiday hiatus and I just wanted to give you a heads up on a supervisory letter issued by NCUA in late December. If your credit union has money servicing businesses such as check cashers or money transmitters within your field of membership (FOM), take a look at this guidance which explains the basic responsibilities that credit unions have when opening accounts for these businesses. Frankly, none of what the NCUA is suggesting should surprise you, and if it does, you should get to work on improving your BSA processes as soon as possible.
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.