SAN DIEGO–What does the future hold for the economy, NCUA and its exams, potential innovations in deposit insurance?
Those questions and more were posed during a Q&A at NACUSO’s annual conference here with two industry leaders.
Participating were Dan Berger, CEO of NAFCU, and Jack Antonini, who heads up NACUSO. The session was moderated by Guy Messick of Messick Laurel and Smith.
Here’s a look at what was discussed:
Q: How resilient is the credit union community to a potential recession or slowdown?
Berger: We track this very closely, and I am an economist by education. The stock market has rebounded a little bit, but also remember at the end of March the yield curve did something that is usually a precursor to a recession, and that is it inverted. A couple of things to keep an eye on are some headwinds to plan for. One, China’s economy beginning to slow a bit. The other thing to keep an eye on is corporate debt in this country, at $9 trillion, is the highest it’s ever been. Global corporate debt is $170 trillion. That starts coming due in the fourth quarter of this year, so you have to have growth and expansion to begin paying that back. The economy is strong, but these are things to keep in mind.
Antonini: Of that $9 trillion, about $2 trillion is below investment grade and it’s going to be more costly when they go to refinance that. It’s going to have a ripple effect that’s going to be negative. We do need to prepare for it and be ready.
Messick: Approximately 200 credit unions are merging out of existence per year. What can be done about that?
Berger: You’re doing exactly what you have to do at this meeting. You have to collaborate. You have to have the economies through shared services, backoffice. That kind of consolidation is going to continue to go on, but the way to control that is to do more together. Form a CUSO, become a CUSO. We expect (the mergers) to continue for another five years as we get down to 3,500 to 4,000 credit unions.
Messick: What’s happening in credit union lending?
Berger: In my travels around the country, lending has been great. Auto lending has been strong, but it softened a bit in Q1. We continue to grow members. The softening in mortgages has been about lack of inventory, particularly in high-cost areas. Lenders are there to lend. But the price point has jumped and affordable housing has become an issue.
Antonini: Increasing rates have made housing less affordable, but we’ve seen a respite in rates. You read about people dipping into the subprime category, but we’re not seeing that in credit unions.
Berger: We’re not expecting a recession to be as deep as we saw 10 years ago. But the first people to turn the keys in are in those lower scores.
Messick: How hard is it going to be to get the MBL cap changed in the FCU Act?
Berger: We get bills introduced every year. But this is a divided government. I’ve been doing this 30 years and it’s as hostile as I’ve seen on both sides. It’s going to be pretty difficult to get anything moved. They are so far apart; the House and Senate have nothing in common.
Antonini: The one good thing that has happened is that loan participations in MBLs don’t count against the 12.5% cap.
Messick: Does legislation to exempt business loans made to veterans have legs?
Berger: It does, but there is no real consensus yet and we won’t know for six to eight months.
Messick: Another issue is cannabis, with federal laws causing angst. Are we near a point of solving that?
Berger: It has really built up momentum. For liquidity purposes and fee income, it’s an opportunity to look at. But it remains a felony under federal law, so you have to weigh the risks. All you need is a federal prosecutor that wants to make a name for himself or herself to go after a financial institution, but society dynamics are changing.
Messick: What about the threats from fintechs?
Berger: There are fintechs in this room. They are not inherently evil. What we are pushing for at NAFCU is that they have to comply from a regulatory standpoint with the same rules you do. Down the road we’ll see if they have the systems in place to deal with a downturn. From a fintech standpoint, your phone is your new branch. You can’t chase every shiny squirrel out there, but you have to make sure people can have access to the money and can transact in a frictionless way. People want to push one or two buttons and be done. It’s not just for Millennials or kids, it’s everybody.
Antonini: As you think about working with fintechs, while it can seem like we are going hat in hand, they are owned by private equity companies that beat them up every month about revenue and valuation. What they need is what we have. We start with members and then look for the right delivery channels for our members. If you work with somebody, make sure you have a good agreement in place with good service standards. When I was at USAA Bank, we would ask members if they would recommend a service to a family member, and if it was below 90%, 95%, we would make changes.
Messick: What about the OCC charter for fintechs?
Berger: It’s still being looked at. We at NAFCU support the fintechs being part of the regulatory scheme. It has to be a level playing field.
Messick: On cybersecurity, it’s being used by NCUA as it seeks vendor authority. Where are we on vendor security, and what about the real threat of cybersecurity?
Berger: We have a new board, with Rodney Hood as chair and Todd Harper as the new member. That’s going to be an issue they look at. We’re opposed to third party vendor authority, but we’ll have to wait and see. They have been pushing for it. It’s a camel under the tent sort of issue. Once you give them access to a little bit, they don’t just want that first piece of pie, they want that second and third piece. It’s going to be a costly endeavor to you.
Antonini: We think it’s too costly to apply to all types of vendors. We did have a meeting with NCUA and they talked about limiting it to cybersecurity, which if they were willing to do that would be more palatable. But we remain opposed to it.
Messick: As the number of banks shrinks, the number of FDIC employees goes down. But that’s not the case with staffing at NCUA. Can you talk about the philosophy at NCUA in allocating examiners?
Berger: When the number of institutions drops, at FDIC and OCC, their budget drops. Yet the NCUA budget keeps going up. To former Chairman (J. Mark) McWatters’ credit, he did slow the slope of that increase, but it’s still an increase. We’d like it to follow the model of FDIC. There is also technology out there to reduce some of the pre-examination work. Every year we aggressively urge the NCUA to reduce its budget.
Antonini: The budget has gone up considerably, 30% to 40% since when we had 10,000 credit unions. Now have half as many. There is clearly room to reduce that budget. One person told me they have a staff of seven, eight people at their CUSO, and NCUA showed up with 15 people for three weeks. That’s kind of ridiculous.
Audience Question: Nothing has really changed in deposit insurance since 1934. There is no risk-based adjustment, no options for uninsured accounts. What can we do to start to look at deposit insurance, and how important is it to members, and what should it look like?
Berger: Our chief economist, Curt Long, is looking at that. In hindsight, we would probably separate the insurance function from NCUA. We will have a white paper coming on that.
Audience Member: What is the future of credit unions and field of membership in the courts?
Berger: From our standpoint it’s going to be tough. It has a chance to lose. Those who have invested a lot of money and advertising, hopefully, they will grandfather some of that in if it doesn’t go our way. I think it’s going to be an uphill battle.