Posts tagged ‘Federal Reserve Bank of New York’

How The Fed Intervention Is Hurting Credit Unions

My blog’s a little late this morning because I put aside what I was going to write about after I saw the amount of attention that this opinion piece from Bill Dudley, the former president of the New York Federal Reserve and now a professor at Princeton, is getting. In it he explains why the Feds unprecedented intervention in the economy, which he predicts will soon reach $10 trillion, is a manageable and necessary support, at least in the short term.

He is right. But this is little consolation if you run a credit union or a small community bank. Once again, the Fed is intervening in the economy in a way which helps large businesses and investment banks while doing little to support mainstream lending institutions. It’s time for this to change.

There are two ways to help an economy in trouble. The first and more traditional method is to stimulate economic activity by flooding it with cash. This is what Congress did by printing money and sending it out to consumers. This is analogous to using an economic defibrillator to jolt the economy back to life.

A second much less common approach which the Fed started aggressively using in the Great Recession is to intervene directly into government bond markets to keep interest rates artificially low. This is more analogous to putting the economy on a ventilator since the Fed is so closely intertwined with the economy that it has to cautiously sell off these bonds in a way which doesn’t harm the economy.

In dealing with COVID-19, the Fed has taken this approach to a whole new level. It has set-up mechanisms not only to buy government bonds but corporate bonds as well. This is in addition to setting up facilities to   make loans to businesses too big to qualify for the PPP.

This approach has worked. Despite shutting down the economy, corporations still have cash and the market is booming, in part because there is nowhere else to get any type of return on investments.

But here’s the catch. As Dudley points out, when the Fed engages in such a large amount of purchases, the resulting money has to go somewhere:

“When the Fed buys a financial asset from a private holder, the proceeds received by the seller typically flow back into the banking system. Even if the seller reinvests the proceeds into some financial asset rather than depositing it at a bank, the cash eventually ends up either as an increase in currency outstanding or an increase in bank deposits. Because most people don’t want to hold large amounts of cash, almost all of the money eventually finds its way back into the banking system.”

Don’t banks want to convert all this cheap money into cheap loans? Perhaps, but Dudley points out that in 2008 the Federal Reserve Board was given the right to adjust the interest rate it gives on Fed accounts held by financial institutions. This was done to ensure that all that cheap money didn’t fuel inflation.

All this comes at a very steep price to those of us who believe that for capitalism to work, it can’t be a “Heads the big guys win, Tails the little guys lose” system. Once again credit unions are being driven into Prompt Corrective Action because members need a place to put their cash and interest rates are being kept at artificially low levels.

For the second time in less than a decade policy makers are explaining why this is all necessary. It’s time to start calling the Feds intervention what it is: a justifiable bail-out of larger companies and the institutions that fund them. It’s time Congress consider providing direct funding for credit unions and community banks. After all, the industry should be allowed to fight on a level playing field.

June 22, 2020 at 10:52 am 1 comment

FinTech Is Fundamentally Changing Mortgage Lending Right Now

The digitalization of mortgage lending is not a gimmick to attract millennials but a fundamental shift in the way mortgage lending is done. If you don’t have plans in the works for a fully automated mortgage production process, you should. And if you already do have such plans in the works, you should speed up your timetable for deployment. That is my takeaway from this fascinating bit of research released in February by the Federal Reserve Bank of New York. It’s actually worth reading on your own.

The researchers examined the impact of FinTech lenders. For purposes of their research they defined these companies as lenders employing a beginning-to-end online mortgage application platform with centralized mortgage underwriting and processing augmented by automation. In other words, while aspects of the mortgage origination process have been automated for more than two decades now, what they were interested in examining was the efficacy of Rocket Mortgages of the world. The research looked at some of the most fundamental questions involving FinTech mortgage Lending and concluded that beginning-to-end automation of the mortgage process has so far proven to be not only faster but beneficial to consumers across socioeconomic groups.

The efficiencies speak for themselves. According to the researchers, FinTech lenders process loans 7.9 days faster than non-FinTech lenders. This is true even when FinTech’s are compared to non-deposit taking mortgage lenders suggesting that these results aren’t simply a reflection of fewer regulations.

Critics have suggested that FinTech’s are quicker because they are less careful about who they lend to. Not so the researchers concluded. Loans originated by FinTech lenders are 35% less likely to default than comparable loans originated by non-FinTech lenders.

Does this mean that FinTech lenders are simply picking off the best potential applicants? The researchers found “that the lower default rates associated with FinTech lending is not simply due to positive selection of low risk borrowers.” This is speculation on my part but maybe automation makes it easier for lenders to quickly adjust underwriting standards in response to changing market conditions.

For example, it appears that because the FinTech model is so automated it can more quickly adjust to changes in the interest rate environment. This typically benefits borrowers whose interest rates average 2.3 basis points lower than those offered by brick and mortar lenders.

To sum it all up, if you are a traditional lender, you are competing against a business model which provides cheaper mortgages to a large cross-section of the mortgage marketplace more quickly and efficiently than was conceivable even five years ago. It’s no wonder the market share of FinTech lenders is growing at a rate of 30% annually from a mere 34 billion in originations in 2010 to 916 billion in 2016.

For those of you hoping to be more actively involved in mortgage lending, the writing is on the wall. You better move quickly before your existing approach to lending ends up as an exhibit in the Smithsonian.

March 8, 2018 at 9:50 am 1 comment

The Real Interest Rate Risk To Credit Unions

I’m feeling a little bit like Nostradamus this morning before Fed Chairman Ben Bernanke gives his semi-annual assessment of the U.S. economy to Congress today.  Here’s what Nostradamus has to say.

This is the most important presentation to be given by the Chairman in quite some time.  For years now federal regulators have been harping about the dangers imposed by a sudden rise in interest rates, a fear exacerbated by the Fed’s decision to buy $85 billion of mortgage- and treasury-backed securities each month in order to  keep mortgage rates artificially low (by the way, as someone looking for a house right now, Nostradamus says thank you!).  Still, the most extreme concerns of a sudden rise in interest rates caused by a reheated economy are kind of like my prediction about the end of the world.  Some day I will be right, but in the meantime let’s get on with the business of banking.

In reality the only plausible scenario for an interest rate spike, at least any time soon, would involve a mismanaged exit from the FED’s bond buying program.  This is one you don’t have to take my word for.  In his speech the other day, William Dudley, the Chairman of the Federal Reserve Bank of New York, noted “There is a risk is that market participants could overreact to any move in the process of normalization.  Indeed, there is some risk that market participants could overreact even before normalization begins, when the pace of purchases is adjusted but the level of accommodation is still increasing month by month.”

This is why Big Ben’s testimony is so important today.  The question is no longer just when the FED will ease its bond-buying program but how exactly it will disentangle itself from the bond market without leaving a sudden spike in its wake as investors seek to calibrate the after effects of the FED’s bond buying binge.  His task is not an easy one.  He will never advocate prematurely ending the program and as of right now, not even Nostradamus knows what impact budget negotiations will have on future economic growth.  Conversely, an increasing number of Federal Reserve Board Members are open to considering that now may be the time to begin slowing down this period of quantitative easing.  Nostradamus predicts that the Chairman will emphasize the continued economic uncertainty — let’s not forget the economy is still sluggish, to put it euphemistically — and make it clear that he will be one of the last people to advocate an end to the Fed’s current policies.  This approach gives him the flexibility he needs to respond to unexpected improvements in growth while minimizing the chance that his mere words will cause interest rates to rise.

By the way, Nostradamus also predicts that disgraced former Queens Congressman Anthony Weiner will enter the race for New York Mayor.  Actually this isn’t a prediction at all, his video announcement is all over today’s papers.   I have no way of knowing whether or not he’d make a good or bad mayor, but when did we become such a forgiving society that a complete abdication of personal responsibility, accountability and self-respect doesn’t disqualify you from public office?  People love to say that politicians are cynical, maybe it’s the people who are too cynical for electing politicians who feel they can get away with anything so long as they publicly apologize.

Have a nice day.

May 22, 2013 at 8:01 am 2 comments

Three Questions For The Newest Member Of The Board

If the CU Times is correct, then my very quiet campaign to be nominated to serve on the NCUA Board has failed.  The Obama Administration is set to nominate Rick Metsger, a former state legislator who the Credit Union Association of Oregon once named its Legislator of the Decade.

The position has two unique roles, as I see it.  One is to be an advocate for the industry as a whole.  This is the fun part of the job where you get to extol the virtues of the cooperative movement, bemoan excessive regulation and pat board members on the back for their thankless service.  A second less exciting but more important part of the job is to establish the framework for the appropriate oversight of the safety and soundness of the industry.  So here are the three questions I would want addressed by the NCUA staff if I ever get my nomination through the vetting process.

1)  What are the systemic risks facing the industry as a whole?  In a recent speech, Federal Reserve Chairman Ben Bernanke talked of a shift in examiner emphasis between monitoring the operational risks of individual banks and recognizing trends that pose a risk to the banking industry as a whole.  For example, the mortgage meltdown triggered the financial crisis but it was the inability of examiners to recognize the interconnectedness of banks to the mortgage industry that turned a cyclical decline in housing prices into a threat to the entire economy.

Does NCUA have an idea of what systemic risks, if any, are unique to the credit union industry?  The NCUA Board throws around the term systemic risk, but it means more than just paying particularly close attention to larger institutions.  It means identifying those vulnerabilities that cause a threat to all credit unions that only regulators are in a position to take action against.  Remember, this is an agency that didn’t have an office of chief economist until 2010, so you to excuse me if I am a little cynical.

2)  Are some credit unions too small to succeed?  Are the days of the small credit union numbered?  Not necessarily, but there are some baseline regulations with which all credit unions and other financial institutions should have to comply and to the extent any institution doesn’t have the resources or expertise to meet these expectations, then how should NCUA respond?  On one track, more mergers seem inevitable.  But NCUA can demonstrate that there is a difference between a credit union that is small for the sake of being small and a small credit union with a well-executed business strategy and growth plan.  What are examiners doing to strike the right balance between the two and is it enough?

3)  How much should NCUA coordinate its activities with state level examiners.  The trend in recent years has been to aggressively obliterate distinctions between state and federal supervision with the result that the utility of the dual chartering system is very much in jeopardy.  This makes absolutely no sense.  It’s a lousy use of resources at a time when every dollar we give to regulators has to be well spent and it makes it more difficult for state chartered credit unions trying to comply with two separate assessments of how best to assure the safety and soundness of their institutions.  I want to know if our newest board member is willing to explain precisely where NCUA feels the line should be drawn when overseeing activities of state chartered institutions.

Americans Continue to Pay Down Debt

The Federal Reserve Bank of New York released its quarterly survey of household debt and Americans continue to pay down their outstanding bills.  Of course, this is a good news, bad news kind of thing.  There can be no robust economic recovery without consumer spending, so the question is at what point do people feel it is time to start getting out the credit card again and going out to dinner?  If this new-found frugality continues, at some point we are going to have to scale down our expectations for long-term economic growth.

See you tomorrow.

May 15, 2013 at 7:57 am Leave a comment

FED Report Underscores Need For MBL Reform

imagesreport released by the Federal Reserve Bank of New York yesterday underscores that MBL reform is more than a proxy for the never ending battle between banks and credit unions:  it is also a common sense proposal to increase access to capital for small businesses that continue to be choked off from growth.

According to the results of the New York FED’s small business credit survey covering New York, New Jersey and Connecticut, “the ability to access credit remains a wide-spread growth challenge for small businesses in the region even among profitable firms.”  Here’s the bottom line from a policy perspective.  Of the 800 small businesses surveyed, 49% cited access to capital as a barrier to growth but only one-third reported even bothering to apply for credit, apparently believing that the effort wouldn’t be worth the time.  This is actually an improvement over previous surveys.

What about the bankers’ argument that they are actually ready, willing and able to make small business loans but just can’t find applicants?  The success rate for small businesses applying for credit ticked up slightly in 2012 at 63% and this slight increase was primarily attributable to increased availability of lines of credit.  In one of the more disturbing statistics from the report small businesses seeking loans over $100,000 had a 73% success rate; whereas those seeking loans below $100,000 had a 57% success rate.

Here’s my polemical point of the day.  According to the survey, the average small business loan was $100,000.  Could someone other than a banker opposed to MBL reform please explain to me why a law that defines a $50,000 loan as a business loan makes any sense?  Politicians all say they want to help small business, but most of the small businesses I know of are run by one or two people and when the equipment goes down, they can’t work.  A law that allows every financial institution that wants to lend out money for a new truck for the landscaper or a new mill for the lumber jack would help more than just those lending institutions.  It would help our economy grow.

 

May 14, 2013 at 7:33 am 2 comments


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.

Enter your email address to subscribe to this blog and receive notifications of new posts by email.

Join 726 other followers

Archives