Posts tagged ‘Federal Reserve’

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

Fed Proposes giving merchants more choices when processing online payments

Good morning folks, last week the Federal Reserve board proposed regulations that would interpret the Durbin amendment as mandating the type of technology your credit union uses to access debit card networks.

There are two basic types of technologies used to process debit card payments: Single-Message systems send a single message to facilitate a payment transaction while a Dual-Message system uses– you guessed it– two messages. When the Durbin amendment was passed more than ten years ago, either of these approaches could easily accommodate in-store transactions, but SMS technology was not able to accommodate card-not-present technology.  Fast forward to the present day and, according to merchants, some of the largest issuers still don’t accommodate online transactions even though technology now makes it possible to do so. This distinction has grown in importance as online transactions have grown on average 17 percent a year not including the dreaded 2020.

Not surprisingly, the merchants are complaining. They argue, and the Federal Reserve agrees, that since many issuers do not offer the use of SMS to process online transactions they often find themselves unable to choose a competing network. In response to these concerns, the Fed has proposed adding commentary to Regulation II specifying that card-not-present transactions are a specific type of transaction for which a merchant must have access to at least two unaffiliated networks.

After reading the preamble, I’m curious if this will have any impact, particularly on smaller credit unions, or if the Federal Reserve’s new mandate can be accomplished with a touch of a button. If it is the former situation, then get the word out to you association ASAP; if it is the latter, well it was only a matter of time before regulators caught up to the huge shift towards online shopping.

May 10, 2021 at 9:08 am Leave a comment

NCUA is doing the right thing when it comes to assessments

As blog followers know, there are occasions when I like to remind everyone that the opinions I express are mine and mine alone. This is one of those times.

The NCUA Board has created a low-level stir within the industry by suggesting at its meeting last week that it may have to seek an assessment from credit unions to make up for shortfalls in the share insurance fund caused by the sudden infusion of deposits triggered by the pandemic. NAFCU even wrote this letter to the Board urging it to hold off on any assessments and instead consider increasing the range of investments that credit unions are allowed to make. 

In fact, the Board did exactly the right thing by publicly discussing the share insurance fund. Credit unions should hope for the best but prepare for the worst, and begin preparing now for an assessment in the coming months. 

First let’s make sure we’re all on the same page. As a matter of federal law, NCUA must impose a restoration plan if the equity ratio falls below 1.20%. Federal law also permits NCUA to establish a Normal Operating Level of between 1.20 and 1.50. 

The facts don’t lie. According to the NCUA, the Share Insurance Fund equity ratio has dropped to 1.22% as of June 2020. The primary reason for this sharp decrease has of course been an almost 13% growth in insured shares. The current ratio is well below the NCUA’s Normal Operating Level of 1.38%. But the numbers aren’t as bleak as they first appear. In October, the fund will receive an infusion of $1.5 billion from insured credit unions as part of their annual contributions. 

Strip away the numbers and what you have is yet another debate over just how long lasting the economic downturn is going to be. If you believe that the indestructible mortgage industry is going to continue to rumble along, that the unemployment numbers will continue to defy conventional wisdom and continue to decrease, and that members will be well positioned to pay back forbearances as a vaccine replaces the new normal with a real normal, then it makes sense for NCUA not to prematurely impose additional assessments. 

In contrast, if you are inclined to believe, as many officials at the Federal Reserve are, that the economy will peter out without further congressional stimulus, that a sizable number of forbearances will never be repaid, and that we may very well see a second wave of COVID economic lockdowns in the coming months, then NCUA would be derelict in it’s duty not to protect the share insurance fund. Incidentally, the FDIC has already had to impose a restoration plan on banks.  

September 24, 2020 at 9:36 am Leave a comment

Feds Policy Shift Signals Lower Interest Rates Are Here To Stay  

The Fed has a dual mandate to both foster economic growth and maximum sustainable employment.  Yesterday the Fed made an historic announcement that will have an immediate impact on your credit union.  In a nutshell, the Fed is going to tolerate more inflation and be more sensitive to the short-term employment consequences of future interest rate hikes.  RIP to the Paul Volcker era.

In 2012 the Federal Reserve issued a Statement on Longer-Run Goals and Monetary Policy Strategy.  By the hyper-conservative standards of the Federal Reserve, this statement represented a radical departure from Fed practice by providing forward guidance to the public on the framework it would use when deciding to raise or lower interest rates.

The amended document makes several important changes in emphasis.  First, the Federal Reserve simply can’t cut rates any lower.  By signaling a willingness to tolerate inflation, it is hoping to preempt fears that decreases in unemployment or robust economic growth will result in the Fed immediately raising interest rates.  In the amended statement, the Fed is no longer going to be concerned if inflation consistently runs above the Fed’s 2% target rate.

Furthermore, the Fed is shifting its assumptions about how low unemployment can go before triggering inflation.  Specifically, the Fed commits to assessing “shortfalls in employment” when deciding whether or not to raise interest rates.  The importance of this shift was underscored in a speech by Fed Chairman Powell accompanying the new statement in which he explained that the Fed has been influenced by the fact that historically low unemployment rates have not triggered inflation.  Furthermore, this trend has been a particular benefit to Black and Hispanic individuals who have experienced “life changing gains for many families”.

Just how big a shift does the new Fed policy stance represent?  A lot of commenters have pointed out correctly that these changes put in writing shifts that have already been taking place for several years.  But this analysis misses the importance of the moment.  Inflation was the number one economic threat that the Federal Reserve has battled since the late 1970s.  With the Fed’s announcement yesterday, it announced a paradigm shift in which the Volcker epic has ended.  Going forward, the lack of inflation is to be as feared as much, if not more, than the potential risks of too much inflation.

August 28, 2020 at 9:44 am Leave a comment

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

Participating Credit Unions Should Get PPP Capital Relief

The Federal Reserve continues to increase its unprecedented intervention into the American economy. Yesterday, it issued joint regulations with the Treasury and the FDIC permitting the Federal Reserve Banks to accept Paycheck Protection Program loans as collateral for short term loans to financial institutions. What’s more, the FDIC decided that these loans would not negatively impact either a bank’s Risk Based Capital requirements or their leveraged capital requirements. There are a couple of lessons in this action for the NCUA.

Most importantly, if the FDIC feels it has the authority to waive the negative impact on capital requirements for banks making PPP loans, then NCUA should consider extending similar treatment to credit unions making these loans to their local businesses. After all, federal law gives the NCUA the responsibility to develop a regulatory framework similar to that imposed on banks while taking the unique cooperative structure of credit unions into account.

In explaining why PPP loans should be exempt from negative capital treatment, the regulators noted “PPP lenders are not held liable for any representations made by PPP borrowers in connection with a borrower’s request for a PPP loan.” According to a SBA conference call earlier this week (I don’t know about you, but the days are all coming together for me) there had only been a little more than 300 new financial lenders signing up to participate in the PPP program. I’m going to assume that the vast majority of these new lenders are community banks.

I hope I’m wrong. For as long as I’ve been here I’ve heard credit unions consistently argue that they should be allowed to make more small business loans. Now they have the opportunity to participate in a way that directly helps their membership in their time of greatest need. I’ve said it before people and I’ll say it again, if not now, when? If not you, then whom?

On that note, enjoy your social distance holiday weekend. I will be spending my weekend watching replays of old Masters golf tournaments just to get my sports fix. I won’t tell my kids that I know who won so they think I’m a sports genius.

April 10, 2020 at 10:58 am 1 comment

Fed Gives Credit Unions Greater Flexibility To Comply With Regulation D

Since the Federal Reserve announced that it was eliminating transaction account reserve requirements, credit unions have been wondering what impact, if any, this has on their compliance requirements under Regulation D.  This is the regulation which sets limits on the number of account transactions that a member can conduct each month while still allowing credit unions to classify the account as a savings account.  In a nutshell, credit unions must still comply with Regulation D but by eliminating the reserve requirements, credit unions give their members greater access to their savings accounts without being subject to increased reserve requirements. 

Section 19 of the Federal Reserve Act gives the Fed the responsibility of imposing reserve requirements on financial institutions.  Regulation D effectuates this goal by imposing reserve requirements on transaction accounts.  For financial institutions, this means that any account which allows a member to make more than six transactions a month is subject to a reserve requirement.  Under Federal regulations, the higher the value of an institution’s net transaction accounts, the higher its reserve requirements become.  Traditionally, institutions that had between 15.2 million to 110 million in net transaction accounts have been subject to a 3% reserve requirement and those above that threshold must set aside 10% in reserves. 
The Fed’s decision to eliminate the reserve requirements has two important implications for credit unions.  First, it means that the money currently being set aside to meet reserve requirements can be reallocated.  Secondly, credit unions and banks can now allow their members to conduct more than six transactions a month without triggering increased reserve requirements.  With the economy taking so many unexpected turns, this could be useful to members with unanticipated expenses who want to access their savings accounts.
However, here is the tricky part.  All institutions still have to report this information to the Fed.  Some credit unions only have to do this once a year while the largest institutions are subject to weekly reporting requirements.  When making these reports, remember that accounts on which more than six transactions can be conducted must be classified as transaction accounts.  As you can see, Regulation D has not been eliminated, but it has been temporarily defanged.

March 19, 2020 at 9:30 am 1 comment

Seven Ways COVID-19 Is Impacting Your Operations

Greetings from the state that is number one in COVID-19 cases; as of Sunday afternoon.

There have been an amazing number of developments affecting your credit union over the weakened.  I am emphasizing those that you may not have heard about yet.

New York Delays New Servicing Regulations

I actually have some good news to tell you this morning.  I found out over the weekend that New York’s  Department of Financial Services has issued an emergency regulation putting on hold for an additional 90 days new servicing regulations which many credit unions and mortgage bankers were wondering how they were going to comply with.  In announcing the delay DFS Superintendent, Linda A. Lacewell explained that “the volume and complexity” of the new regulations, especially since they require new programing and disclosure requirements for home equity lines of credit, has led the department to conclude that businesses need more time to comply, particularly at a time when they have to concentrate on the pandemic.

A special shout out to the New York Mortgage Bankers Association, which did a great job alerting stakeholders to the difficulties in complying with this regulation.

State Issues COVID-19 Emergency Relief Order

New York’s Department Of Financial Services issued an order exempting state licensed and state chartered financial institutions including state chartered credit unions from some regulations with which they would normally have to comply.  Most importantly, these institutions can now close and relocate branches and offices without first providing notice to DFS.  In addition, licensed individuals such as mortgage originators can work from home with the understanding that they are still subject to New York’s regulations.  Entities are still expected to inform New York State of any relocations.

Additional Developments…

Also over the weekend, the Governor asked businesses that could do so, to voluntarily shut down and allow their employees to work from home.

Finally, the state has imposed limits on the size of mass gatheringsHere is his first order.  This situation is very fluid and we may see further reductions in the authorized size of mass gatherings.

Fed Gone Wild

Just how low can the Fed go?  The Federal Reserve Open Market Committee announced yesterday that it was slashing the Federal Funds rate to zero (!) and “expects to maintain this target range until it is confident that the economy has weathered recent events…”

When the history of this pandemic is written, it will be marked as the end of a unique period in American history during which the Federal Reserve exercised a decisive impact on the American economy.  In 1987, Alan Greenspan calmed the stock market following its dramatic decline; it was the Fed that helped minimize the impact when the dot-com bubble popped; and Ben Bernanke mitigated the impact of the Great Recession of 2008 by going on a mortgage buying binge.

My how times have changed.  Interest rates are already too low to have much of a stimulus impact and they will have no effect in coxing Americans out of their homes to hoard more toilet paper.

The Fed did take one important step recently.  It announced a massive infusion of funds into the repurchase market.  It also announced it would accept a broader range of securities for these arrangements.

The repurchase market plays an absolutely crucial role in the economy.  It is the mechanism by which the largest of the large financial institutions manage their liquidity on a daily basis by getting short-term loans of cash in return for collateral such as bonds.  The system has had some hiccups over the past year and no one quite knows why.  Stay tuned.

With the Fed out of bullets, it is up to Congress and the President to come together and agree on a stimulus package.  On Saturday, the house took the first step in this legislative dance by passing legislation which extends limited family leave protections to some employees and increasing funding for programs such as SNAP.  The precise impact of this proposal is being debated this morning, with critics already complaining it contains too many loopholes to help most workers.  If, as expected, the Senate passes the bill this week and the President signs it, the real contentious debate gets started.  Both sides are already jockeying for position over what should be included in a larger stimulus package.

March 16, 2020 at 10:38 am Leave a comment

If You’re Responsible For Your CUs BSA Compliance, You Are On The Hook If Things Go Bad

If your credit union does not have adequate staff to appropriately identify and respond to suspicious activity it may be violating federal law and putting both the credit union and its BSA compliance officer at risk of being fined.

That’s my major takeaway after FinCEN recently announced a $475,000 fine against the individual who had been responsible for U.S. Bank’s AML/BSA program. This fine is in addition to a separate civil penalty already imposed on the bank. It’s a strong warning to financial institutions and should be reviewed by anyone responsible for implementing and overseeing your AML/BSA program, including your board.

The order is a not too subtle warning to all institutions that they are expected to maintain staff levels commensurate with their level of BSA risk and that they can’t rely on software to demonstrate good faith compliance. It is also a reminder that whoever is in charge of BSA compliance at your credit union has an obligation to advocate for appropriate resources.

First a quick reminder. Pursuant to 31 U.S.C. § 5318 (h) your credit union must have an anti-money laundering program that includes, at a minimum: internal policies, procedures, and controls; has a designated compliance officer; an ongoing employee training program; and an independent audit function to test its BSA programs.

Michael LaFontaine was the former chief operational risk officer at U.S. Bank National Association. In this capacity he had overall authority and responsibility for BSA compliance. FinCEN determined that he willfully violated these core responsibilities.

Most importantly, he capped the number of alerts that the bank’s BSA monitoring software would generate resulting in thousands of potential BSA violations going unreported. He did this even after Wachovia was fined by FinCEN for engaging in almost identical activity and despite being told by employees that capping reports was inappropriate.

Secondly, he was repeatedly warned by regulators and staff that the size of the bank’s BSA staff was not commensurate with its level of risk. FinCEN explains that “While he did take certain steps to upgrade the AML Program, including advocating for and receiving funding for the replacement of the system in its entirety, his actions were inadequate to correct the deficiencies.” This is a reminder to you BSA compliance people out there to document the efforts you take in the event you conclude that your staffing levels and resources are not commensurate with the credit union’s BSA risk profile.

Will The Fed’s Rate Cuts Do Any Good?

With the Dow Jones Industrial Average declining quicker than Democrats are exiting the presidential primaries, the Fed announced an emergency 50 Basis Points cut in the Fed Fund Rate on Tuesday. Let’s call this the Corona Cut. Far be it for me to question the aggregate wisdom of the Fed, but this one is a bit of a head-scratcher. My sentiments are summed up nicely by Greg Ip of the WSJ who wrote (subscription required):

“The Fed cannot save the U.S. economy from the coronavirus, for two reasons. First, it can’t restart factories that are missing parts as the virus disrupts supply chains, nor can it persuade worried vacationers to fly. Second, and potentially more important, central banks are losing their grip on the business cycle.”

March 5, 2020 at 9:50 am Leave a comment

A Tuesday Morning Hodgepodge

Sorry I got this out a little late this morning, but there are a few things I wanted to give you a heads up on.

Implications of USAA Patent Suit Analyzed

A faithful blog reader sent me this article (subscription required) from American Banker analyzing the implications of USAA’s $200 million trial verdict against Wells Fargo for a violation of its remote deposit capture technology. The article points out that many institutions have to wait and see how this unfolds, but in the meantime, it is likely that once the judgment is finalized, banks and credit unions will be receiving not so friendly letters from USAA requesting licensing fees. The article also does a good job of outlining the history of this litigation which also has important implications for credit unions. Specifically, Mitek and USAA collaborated on developing RDC technology in the early 2000s, but when the relationship soured, the lawsuits started. In 2012, USAA and Mitek sued each other over their competing patent claims to RDC technology. This litigation was settled in 2014, but the parameters of that settlement are unclear at best, as USAA has sent licensing requests to credit unions and banks that thought they were covered under the settlement. We should all be gathering as much information about this case and its implications as we can. CUNA is hosting a free webinar to discuss the latest developments. By the way, I really appreciate the article my friend. But what are you doing texting out articles from American Banker at 11:00 PM?

Are Fair Lending Laws Going to be Scrutinized?

Steering, which refers to directing homebuyers to neighborhoods based on race and sex, is of course illegal for real estate agents. Unfortunately, Long Island Newsday has begun reporting on the results of an investigation into realtor steering practices, in which the paper employed testers of different races to see how they would be treated. The results raised the possibility of widespread steering, at least on the part of the agents tracked by Newsday. I’m bringing this article to your attention because it is the type of report that leads to hearings and legislation. As a result, even though Newsday’s reporting does not involve activities by lenders, you should all be prepared for scrutiny of your fair lending practices.

Will a Lack of Liquidity Trigger the Next Banking Crisis?

I like to say I am paid to be paranoid. I think that is also a good rule of thumb for those of you operating credit unions. After all, if history is any guide, the occasional financial shock is inevitable and we are just about due for one. So, this armchair economist wannabe is happy to report that, in its most recent financial stability report, the Federal Reserve paid special attention to signs that there is too little liquidity in the financial markets, a classic sign that investors sense that a tremor might be coming. Take a look at this graph produced by the Fed:

In addition, the Fed’s analysis is coming during a period of extraordinary intervention by the Fed in the short-term repossession or repo market, in which the Federal Reserve has had to step in and act as a buyer of short-term purchases which banks need for cash, and which private investors such as hedge funds typically view as a quick way of making some extra money off their bond holdings.

On that note, enjoy your day.

November 19, 2019 at 9:46 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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