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Credit Unions Facing Fair Share of Troubles

Posted by Wendell Brock on Thu, Aug 07, 2008

Bank failures get the press, but credit unions are struggling too

The banks and the FDIC may be the ones getting all of the attention, but credit unions and their regulating and insuring entity, the NCUA, are also logging their share of problems. So far this year, a full twenty-one credit unions have failed. Compare this to the number of bank failures, just eight, and one has to wonder why the banks are getting a disproportionate share of media coverage.

The easy answer is the difference in the bottom line. Credit unions generally maintain a far smaller asset value relative to their for-profit counterparts. The largest credit union to undergo an NCUA-managed restructure this year was Cal State 9 Credit Union of California, whose asset base totaled $339 million. Next to the $32-billion IndyMac Bancorp. failure, it's almost understandable why Cal State 9's problems weren't worth the air time. This difference is evident in the total figures as well: the combined asset value of all eight failed banks exceeds $38 billion, while the combined assets of twenty-one failed credit unions add up to only $1.8 billion.

A closer look at the numbers, however, indicates that the current economic crisis may be hitting credit unions harder, despite their smaller size. The largest three failed banks, IndyMac, First National Bank of Nevada and ANB, managed assets totaling $32 billion, $3.4 billion and $2.1 billion, respectively. Remove these three entities from the equation and the remaining five failed banks had an average asset size of about $129 million. That $129 million is far more comparable to the average size of the failed credit union, which is roughly $87 million. Evaluating the data in terms of similar-sized operations, the scale tilts in favor of the banks, with only five failures relative to twenty-one credit union failures.

And still, the system works

Even as financial institutions struggle to recover from fractures in the mortgage, real estate and lending sectors, the federal protections have remained reliable. The deposit insurance provided by the FDIC (banks) and the NCUSIF (credit unions) continues to safeguard customer funds: when an entity fails, the FDIC and NCUA give customers immediate access to all insured deposits. Where a customer's deposits exceed insurance limitations, both the FDIC and NCUA work diligently behind the scenes to recover those funds as quickly as possible. In the days following the IndyMac failure, for example, the FDIC offered to advance customers half of their uninsured deposits immediately. The remaining amounts were transferred to customers in the form of receivership certificates, which will be converted to cash as the bank's assets are sold.  

Panic begets panic

While the customers of financial institutions may be inclined to make a run on their bank or credit union at even a whisper of instability, those panicky actions actually work against the system. The demise of IndyMac is a case in point. Prior to the bank's closure, U.S. Senator Charles Schumer wrote a letter stating his concerns about IndyMac's financial condition. The bank's customers responded by withdrawing $1.3 billion of deposits in eleven days-a swift and pronounced asset depletion that essentially cemented IndyMac's fate. Subsequently, the OTS had no choice but to step in and ask the FDIC take over IndyMac. 

The future may be bright, for some

Unfortunately, the bank and credit union failures are going to continue. Years of enthusiastic underwriting practices combined with troubled economic times are not easily overcome. In the wake of a lending crisis, the future may be brightest for de novo banks that are just now launching operations-nascent entities that aren't weighted down with a legacy portfolio that is marred by bad loans. Also, considering the current real estate market, a new bank enjoys the advantage of writing loans against lower property values. When values start heading back up, those banks will have stronger equity positions. With careful planning and thoughtful underwriting practices, today's de novo banks could be enjoying greater financial stability than most of their competitors for years to come. Given those dynamics, now may be the right time to add a de novo bank investment to your portfolio.

Topics: FDIC, Bank Failure, Community Bank, Bank Regulators, Credit Unions, De Novo Bank Capital, Credit Union Failures, Deposit Insurance, NCUA

House Passes Regulatory Relief Bill with Bipartisan Support

Posted by Wendell Brock on Fri, Jun 27, 2008

This is important news regarding a new level of opportunity and regulations for all financial instutions, including allowing banks to pay interest on commercial checking accounts.  This will spark a wave of intense comptition for deposits! 

WASHINGTON - The House passed by voice vote a bill (H.R. 6312) combining a substantially revised credit union bill with regulatory relief for banks and savings associations. ABA and the banking industry opposed the original credit union bill -- the Credit Union Regulatory Relief Act, or CURRA -- because it would have allowed any federal credit union to branch into entire cities and counties by claiming they are underserved. The association successfully worked with Financial Services Committee Chairman Barney Frank (D-Mass.) to address its concerns in a meaningful way, and ABA did not oppose the revised credit union provisions when the House considered the legislation.

The revised credit union bill, among other things, would narrow the definition of "underserved area" to census tracts that meet a low-income test; eliminate the grandfathering of cities, counties and other areas currently deemed underserved by the National Credit Union Administration; and require the NCUA to publish annual reports on how the credit unions are meeting the needs of those in the underserved areas they enter. The legislation also would limit the kinds of underserved business loans that can be excluded from the credit unions' business lending cap, and limit credit unions' ability to offer short-term payday loans to nonmembers within a credit union's field of membership.

The final bill includes regulatory relief provisions for banks and savings associations that would provide exceptions to annual privacy notice requirements under the Gramm-Leach-Bliley Act; permission to offer interest on business checking accounts two years after enactment; and increased ability for savings associations to invest in small-business investment companies and make commercial real estate loans, while also removing limits on small-business and auto loans.

Topics: Commercial Banks, Credit Unions, Bank Regulation

House Panel Scales Back Credit Union Bill to Address Banker Concerns

Posted by Wendell Brock on Sat, Jun 21, 2008

WASHINGTON - A credit union regulatory relief bill that bankers blocked earlier this year has been significantly revised to address ABA's concerns and will come up for a House vote next week. Because ABA's concerns have been addressed in the revised language, the association will not oppose the measure -- which was combined with ABA-backed bank regulatory relief legislation to form a new legislative package (H.R. 6312) that was introduced yesterday.

The original credit union bill, the Credit Union Regulatory Relief Act (H.R. 5519), would have allowed any federal credit union to branch into entire cities and counties by claiming they are underserved. (Current law allows only multiple-common-bond credit unions to expand into "underserved" areas. When the National Credit Union Administration illegally extended that authority to other credit unions, ABA, the Utah Bankers Association and Utah banks successfully sued.)

House Financial Services Committee Chairman Barney Frank (D-Mass.) made substantive changes to the bill after bankers strenuously objected to an attempt in April to slip the bill through the House using a parliamentary procedure reserved for noncontroversial bills. The changes respond to the specific concerns ABA's banker leadership had identified with the original bill.  The reworked bill, among other things, would:

  • Narrow the definition of "underserved area" to census tracts that meet a low-income test and in which fewer than 50 percent of the families earn more than $75,000 annually.
  • Eliminate grandfathering of areas currently deemed underserved by the NCUA.
  • Require the NCUA to publish meaningful annual reports assessing how well credit unions are meeting the needs of those in their underserved areas. Such reporting requirements have been a long-time goal for ABA.
  • Limit the kinds of underserved business loans that can be excluded from credit unions' business lending cap.
  • Limit the ability to offer short-term payday loans and prevent the use of this section to expand consumer lending.

Because many of the bill's provisions go further than current law to ensure credit unions focus on people of modest means, ABA decided not to oppose the legislation. And while Chairman Frank's support for the bill virtually ensures its passage by the House, the prospects in the Senate, where no companion bill exists, are less certain.

Topics: Credit Unions, Bank Regulation

CU's React to Banking Overhaul

Posted by Wendell Brock on Sat, Apr 12, 2008

Paranoid CUNA Requests Documents of Banker Involvement in Blueprint ...

WASHINGTON - The Credit Union National Association submitted on April 3rd a Freedom of Information Act (FOIA) request seeking documents and records submitted by banking trade groups in the development of the Treasury Department's "Blueprint for a Modernized Financial Regulatory Structure." CUNA's General Counsel Eric Richards wrote: "[t]he general public and nearly 90 million credit union members have a right to know if special interests have attempted to influence Treasury policy order to eliminate not-for-profit cooperative financial institutions, limit consumer choice in financial services, and deregulate the American depository institution sector in an unsafe and unsound manner."

Topics: banks, Credit Unions

American Banking System to be Overhauled

Posted by Wendell Brock on Fri, Apr 04, 2008

Treasury Blueprint Would Abolish NCUA and NCUSIF

WASHINGTON - Among the long-term recommendations of the Treasury Blueprint would be the creation of a new federally-insured depository institution (FIDI) charter. The FIDI charter would consolidate the national bank, federal savings association, and federal credit union charters and would be available to all corporate forms, including stock, mutual, and cooperative ownership structures. A new prudential regulator, the Prudential Financial Regulatory Agency ("PFRA"), would be responsible for the financial regulation of all FIDIs. In explaining its rationale for a single charter, Treasury wrote "[t]he goal of establishing a FIDI charter is to create a level playing field where competition among financial institutions can take place on an economic basis, rather than on the basis of regulatory differences." The operation of the credit union insurance fund would be assumed by the FDIC, which would be reconstituted as the Federal Insurance Guarantee Corporation.  "Some credit unions have arguably moved away from their original mission of making credit available to people of small means, and in many cases they provide services which are difficult to distinguish from other depository institutions." Treasury Department's Blueprint for a Modernized Financial Regulatory Structure.

By: Keith Leggett, American Bankers Association 

Topics: FDIC, banks, Credit Unions, OCC, OTS, National Banks, Thrifts

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